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This report is available at no cost from the National Renewable Energy

Laboratory (NREL) at www.nrel.gov/publications.

Contract No. DE-AC36-08GO28308

Geothermal Exploration Policy 

Mechanisms: Lessons for the 

United States from International 

Applications

Bethany Speer, Ryan Economy, Travis Lowder, 

Paul Schwabe, and Scott Regenthal

Technical Report

NREL/TP-6A20-61477

May 2014
NREL is a national laboratory of the U.S. Department of Energy

Office of Energy Efficiency & Renewable Energy

Operated by the Alliance for Sustainable Energy, LLC

This report is available at no cost from the National Renewable Energy

Laboratory (NREL) at www.nrel.gov/publications.

Contract No. DE-AC36-08GO28308

National Renewable Energy Laboratory

15013 Denver West Parkway

Golden, CO 80401

303-275-3000 • www.nrel.gov

Geothermal Exploration Policy 

Mechanisms: Lessons for the 

United States from 

International Applications

Bethany Speer, Ryan Economy, Travis 

Lowder, Paul Schwabe, and Scott Regenthal

Prepared under Task No. GTP2.9153

Technical Report

NREL/TP-6A20-61477

May 2014
NOTICE

This report was prepared as an account of work sponsored by an agency of the United States government. 

Neither the United States government nor any agency thereof, nor any of their employees, makes any warranty, 

express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of 

any information, apparatus, product, or process disclosed, or represents that its use would not infringe privately 

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trademark, manufacturer, or otherwise does not necessarily constitute or imply its endorsement, recommendation, 

or favoring by the United States government or any agency thereof. The views and opinions of authors

expressed herein do not necessarily state or reflect those of the United States government or any agency thereof.

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Cover Photos: (left to right) photo by Pat Corkery, NREL 16416, photo from SunEdison, NREL 17423, photo by Pat Corkery, NREL 

16560, photo by Dennis Schroeder, NREL 17613, photo by Dean Armstrong, NREL 17436, photo by Pat Corkery, NREL 17721.

Printed on paper containing at least 50% wastepaper, including 10% post consumer waste. 
iii

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Acknowledgments

The authors would like to thank the following individuals for their help in the development of 

this report: Margaret Vo Schaus, Christopher Richard and Jay Nathwani (Department of 

Energy); Tom Williams, Paul Schwabe, Jeffrey Logan, Jaquelin Cochran, Elizabeth Doris, 

Kendra Palmer, Doug Arent, Karlynn Cory and Chad Augustine (National Renewable Energy 

Laboratory); Kirsten Offermanns (KfW Development Commission); Wilson Rickerson (Meister 

Consulting), Anton Wahjosoedibjo (Pen Consulting); and, Colin Williams (U.S. Geological 

Survey).
iv

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List of Acronyms

ADEME Environment and Energy Management Agency (France)

AIST Agency of Industrial Science and Technology (Japan)

DOE U.S. Department of Energy 

FIPP Financial Institution Partnership Program 

GEA Geothermal Energy Association

GFF Geothermal Fund Facility

GW gigawatts (electric)

ITC investment tax credit

KfW Kreditanstalt für Wiederaufbau Bankengruppe of Germany

MOL Hungarian Oil and Gas Company 

MW megawatts (electric)

NEDO New Energy Development Organization (Japan)

PTC production tax credit

USGS United States Geological Survey
v 

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Executive Summary

According to a U.S. Geological Survey (USGS) estimate, the United States has nearly 40 

gigawatts (GW) of power generation potential from identified and unidentified conventional 

geothermal resources (Williams et al. 2008a).1 To realize these resources, geothermal project 

developers must overcome several obstacles that are unique among the renewable energy 

technologies. One significant barrier in geothermal project development is the high investment 

risk during the resource exploration phase, which can make financing a geothermal project 

difficult as compared to other renewable energy sources, including wind and solar (Salmon et al. 

2011). 

Many federal and state policies provide incentives to renewable energy sources, including 

geothermal; however, these policies rarely differentiate between the technologies, with the 

common exception of the level of remuneration provided (e.g., the amount of a rebate or tax 

credit). These incentives, therefore, may not adequately address the more nuanced support 

required to advance geothermal technologies (Doris et al. 2009). For example, at present many 

geothermal policies support the operational phase of the project, but much of the risk is in the 

development phase. If policy-makers wish to incentivize development of geothermal power 

capacity, policies may need to address exploration risks specifically, thereby improving 

developers’ access to financing through this vital stage in the development cycle. 

A number of governments (both in the United States and abroad) and international development 

organizations have supported exploration and confirmation of conventional hydrothermal 

geothermal resources with a variety of public policies. In order to define the scope of this

analysis and provide conceptual clarity, this report focuses on the five general policy types listed 

below, as well as hybrid combinations that have been applied to geothermal and are understood 

to have the potential to support geothermal power in the United States, specifically (see Table 

ES-1): 

1. Loan guarantees

2. Drilling failure insurance 

3. Lending support mechanisms 

4. Grants 

5. Government-led exploration. 

The analysis describes each policy type applicable to the exploration drilling phase and presents 

examples of their use in a variety of countries and regions. It also assesses each policy’s potential 

applicability to the U.S. geothermal market. The report is intended to offer a review of select past

and current policy applications to policymakers, providing a basis for evaluating options for 

future geothermal exploration policies. 

 

1 This number is the combined mean estimate of identified and unidentified geothermal resources. 
vi 

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Table ES-1. Policy Descriptions, Examples, Summary of Characteristics, and Potential Applicability to the United States

Policy Description Examples Characteristicsa Potential Applicability to the U.S. Market

Loan Guarantee: 

As a third party to the transaction, 

a government agency or other 

public entity provides a guarantee 

of debt repayment to a lender in 

the event of borrower default. A 

fee is often required of the 

developer. 

United States; Germany Loan guarantees can provide high leverage 

of private investment in case of low 

payouts but have thus far demonstrated 

limited results in the U.S. geothermal 

market. 

The Section 1705 Loan Program within the U.S. 

Department of Energy (DOE) provided $545.5 

million in guarantees to five geothermal projects, 

although similar programs for renewable energy 

projects may be unlikely due to the political 

environment following bankruptcies of a few loan 

guarantee recipients; however, these 

guarantees were provided to manufacturers and 

not generators. Designing loan guarantees to 

cover loans provided specifically for the 

exploration phase could spur more debt 

financing at a phase primarily funded with more 

expensive equity. 

Drilling Failure Insurance: 

The developer pays a premium to 

access a government-provided 

partial-cost reimbursement. The 

reimbursement is paid in the event 

that the exploration phase does 

not result in a predetermined level 

of success for a given project. 

France; Multilateral banks 

and development 

agencies

Drilling failure insurance can provide high 

leverage of private investment when the 

number of claims is limited. Premiums may 

be cost-prohibitive for developers, and 

there is the potential for large public 

funding expenditures depending on the 

total value of the claims paid. 

Policymakers could offer drilling failure 

insurance as an alternative to loan guarantees 

or lending support mechanisms to reduce the 

cost of financing. An insurance program would 

require a significant up-front allocation of funds

to capitalize the insurance pool. 

Lending Support Mechanisms: 

A government entity reduces the 

cost of the loan by buying down 

the interest rate, providing for a 

longer loan term, paying a portion 

of the interest, or offering some 

other loan support.

Germany In instances when the terms required by 

lenders may be prohibitive for the 

developer, government interest rate 

support could make loan terms more 

amenable (p. 37). Government-supported 

loans (e.g., direct loans or public-private 

partnerships) could successfully leverage 

private investment at subsequent stages of 

development but may crowd out private 

investment in the exploration phase.

An interest rate subsidy provided by the 

government to a private lender could be less 

costly to the government than outright direct 

loans, but such a program would still require 

significant public investment. Public investment 

would also be unrecoverable unless developers 

are required to pay back the interest subsidy 

once the resource is proven. 
vii 

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Grants and Cooperative 

Agreements (Grants): 

A government entity or other 

institution offers cost-sharing 

schemes or other forms of direct 

payments intended to reduce the 

investment cost during the 

exploration phase. 

United States; France;

Multilateral banks and 

development agencies; 

Australia; Iceland; 

Japan

Grants and cooperative agreements can be 

effective for individual project development, 

but depending on the amount of support 

provided, they may result in limited 

leverage of private investment during the 

exploration phase, leading to significant 

public funding commitments. 

Grants and cooperative agreements 

successfully spurred initial growth of geothermal 

projects in the United States but may be limited 

in their ability to significantly impact overall 

market development today due to the low 

leverage of private investment and higher 

funding requirements. 

Government-Led Exploration: 

A government entity undertakes 

exploration activities directly or 

contracts private firms to do so on 

their behalf. Proven resources are 

developed by government-owned 

enterprises or auctioned to private 

firms.

Iceland; Japan; New 

Zealand; Indonesia 

Shown to be effective for project 

development in markets where little to no 

exploration activity is occurring. However, 

government-led exploration provides lowest 

leverage of private investment and highest

level of public investment. 

Despite historical federal support of geothermal

exploration, this policy may not be well suited to 

the United States at present. This is because it

is not market oriented and because of the 

perception that the geothermal market is more 

mature than it was when first spurred in part by 

the government in the 1970s and 1980s. 

a The organizing principle of this section is “leverage” or the level to which a policy can incentivize private investment with public funds The assessments of 

leverage provided within the characteristics column are general comparisons across the five policy types. Actual leverage will depend on the specifics of a 

policy’s design. 
viii

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The key takeaways from this analysis include:

• If policymakers want to encourage more geothermal exploration, they could 

consider policies that initiate lending to early stage projects. Nearly all U.S. projects 

are funded by equity during the exploration phase. Encouraging more lending during the 

exploration phase would provide another form of capital in the form of debt and could be 

done via loan guarantees, government direct loans, or a combination of both. The 

advantage of accessing greater proportions of debt is that this could help lower a project’s 

weighted cost of capital due to the typically lower cost of borrowing funds as compared 

to gaining equity investors. Encouraging lenders to participate in the exploration phase or 

providing loans directly via a “Green Bank” or a program similar to the Loans for 

Geothermal Reservoir Confirmation program could help reduce the cost of capital and 

increase the volume of funding available at the exploration phase.

• There are policy options that help encourage additional equity investment during 

the exploration phase. For example, re-authorizing a cost-share grant program, such as 

those utilized in the United States in the 1970s and 1980s, could help developers limit the 

risk to investors during the exploration phase. 

• Geothermal-specific policy innovations can account for unique project development 

characteristics. One possibility could be tax incentives for exploration-phase drilling. 

Exploration-drilling tax incentives—either in the form of credits or deductions—could 

decrease geothermal development companies’ tax expenses during the exploration phase, 

offsetting some of the financial risk incurred during the exploration phase. Other policy 

options include incentives to encourage the assessment or utilization of geothermal fluids 

co-produced from oil and gas exploration, which could help expand the resource base. 

• Some geothermal incentive policies do not fit neatly into clearly defined categories.

Several countries and multilateral agencies have implemented or are developing support 

mechanisms that overlap the five conceptual policies summarized above. Exploration 

policies can be creatively designed and can be a hybrid of the five general policies types 

described in this report. Examples of this include the loan/cost-share drilling program in 

Japan, the Risk of Non-Discovery of Deep Geothermal Energy loan program in Germany, 

and the Geothermal Fund Facility in Indonesia. 
ix

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Table of Contents

Acknowledgments ..................................................................................................................................... iii

List of Acronyms........................................................................................................................................ iv

Executive Summary.................................................................................................................................... v

1 Introduction........................................................................................................................................... 1

1.1 Background ...................................................................................................................................... 2

1.2 Purpose and Scope ........................................................................................................................... 4

1.3 Report Organization ......................................................................................................................... 6

2 Country Context.................................................................................................................................... 7

3 Background on U.S. Federal Geothermal Power Policies Supporting All Phases of 

Development......................................................................................................................... 10

4 Policy Descriptions ............................................................................................................................ 11

4.1 Loan Guarantees ............................................................................................................................ 12

4.2 Drilling Failure Insurance .............................................................................................................. 12

4.3 Lending Support Mechanisms ....................................................................................................... 13

4.4 Grants and Cooperative Agreements ............................................................................................. 13

4.5 Government-Led Exploration ........................................................................................................ 14

5 Exploration Policy Case Studies....................................................................................................... 15

5.1 United States: Loan Guarantees, Lending Support Mechanisms, and Grants and Cooperative 

Agreements .................................................................................................................................... 15

5.2 France: Drilling Failure Insurance and Grant ................................................................................ 23

5.3 Germany: Loan Guarantee and Lending Support Mechanism ....................................................... 25

5.4 Multilateral Banks and Development Agencies: Drilling Failure Insurance and Grant ................ 27

5.5 Australia: Grant .............................................................................................................................. 29

5.6 Iceland: Grant and Government-Led Exploration ......................................................................... 29

5.7 Japan: Grant and Government-Led Exploration ............................................................................ 30

5.8 New Zealand: Government-Led Exploration ................................................................................. 31

5.9 Indonesia: Lending Support Mechanism and Government-Led Exploration ................................ 32

6 Characteristics of Exploration Policies and Applicability to the United States........................... 34

6.1 Loan Guarantee .............................................................................................................................. 34

6.2 Drilling Failure Insurance .............................................................................................................. 35

6.3 Lending Support Mechanisms ....................................................................................................... 36

6.4 Grants and Cooperative Agreements ............................................................................................. 37

6.5 Government-Led Exploration ........................................................................................................ 39

7 Key Findings and Additional Enabling Opportunities .................................................................... 40

References ................................................................................................................................................ 42

Appendix A. Philippines: Government-Led Exploration....................................................................... 52

Appendix B. Kenya: Government-Led Exploration ............................................................................... 53
x 

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List of Figures

Figure 1. U.S. Geothermal Energy Association’s terms and definitions for geothermal resource 

development ........................................................................................................................... 3

Figure 2. Total projects by year and phase (including unconfirmed projects) .................................... 4

List of Tables

Table ES-1. Policy Descriptions, Examples, Summary of Characteristics, and Potential 

Applicability to the United States ........................................................................................ vi

Table 1. Summary Information for Countries Examined Herein ............................................................ 8

Table 2. Illustrative Qualitative Assessment of Leverage Capability by Policy ................................. 11

Table 3. U.S. Loan Guarantees, Lending Support Mechanism, and Grants and Cooperative 

Agreements........................................................................................................................... 16

Table 4. Geothermal Project Defaults on Original U.S. Loan Guaranty Program............................... 19

Table 5. Geothermal Project Recipients of Federal Loan Guarantees ................................................ 22

Table 6. French Grant and Drilling Failure Insurance ........................................................................... 24

Table 7. German Loan Guarantee and Lending Support Mechanism ................................................. 25

Table 8. Multilateral Banks and Development Agencies Drilling Failure Insurance and Grants ...... 27

Table 9. Australian Grant.......................................................................................................................... 29

Table 10. Icelandic Grant and Government-Led Exploration ............................................................... 30

Table 11. Japanese Grant and Government-Led Exploration .............................................................. 30

Table 12. New Zealand Government-Led Exploration........................................................................... 31

Table 13. Indonesian Lending Support Mechanism and Government-Led Exploration.................... 32
1 

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1 Introduction

The U.S. geothermal market is the largest in the world, with an installed capacity of 3,386 

megawatts (MW) as of February 2013 (GEA 2013). However, the pace of new utility-scale 

geothermal electric projects coming online in the United States has been slow over the last two 

decades. Even considering the most recent period of robust government investment for 

renewables following passage of the American Recovery and Reinvestment Act of 2009 

(Recovery Act), the U.S. market has only grown about 14% in the decade preceding 2012 (EERE 

2012). 

Despite providing reliable baseload power and being a commercially viable technology, 

conventional hydrothermal generation projects face several key challenges to development: 

• A general lack of investors familiar with the technology and appropriate deal structures 

(Salmon et al. 2011) 

• Long lead times between project conception and completion (typically four to five years)

• Remote locations of project sites, potentially requiring expensive build-outs of 

transmission capacity that add to project timelines and costs (Hurlbut 2012) 

• Competition for capital and equipment with other extraction industries, including the coal 

and oil and gas industries (Salmon et al. 2011) 

• High risks and subsequent costs of capital during exploration drilling.

In this report, we focus on the last barrier because the high risks and cost of capital associated 

with the exploration phases is a key challenge to geothermal plant development (Salmon et al. 

2011). Failure to confirm the geothermal resource during the exploration phase results in a 

forfeiture of invested capital. This risk might drive investors away from geothermal financing, 

especially those lenders who have risk appetites that are typically lower than that of equity 

investors.2 Further, those investors are likely to require higher yields to compensate for the risk 

as compared to other stages of geothermal plant development. 

The primary difference between developing a geothermal project compared to other renewable 

energy technologies lies in the challenges of identifying and confirming the resource (Salmon et 

al. 2011). With geothermal projects, the resources must be identified and confirmed on a sitespecific basis whereas with other technologies, such as wind and solar, the initial identification 

can be done on a regional basis (although further assessment of local resources may be 

necessary, especially with utility-scale projects). However, current renewable energy policy in 

the United States does not address geothermal exploration risks specifically (i.e., the production 

tax credit). In addition, current renewable energy policies provide operational incentives, which 

do not directly support these pre-operational and yet vital—and costly—phases of geothermal 

power plant development. 

This analysis focuses on policy options that could potentially fill this gap by providing 

geothermal developers with pre-operational incentives to target the initial, high-risk project 

 

2 In the United States, debt financing is rarely used for this phase of development (Salmon et al. 2011).
2 

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development phases. It builds on the following geothermal policy analyses by referencing 

relevant research where pertinent, while avoiding repetition of the previously conducted work: 

Speer (2012), Rickerson et al. (2012), Salmon et al. (2011), and Doris et al. (2009). 

1.1 Background

The risk profile for geothermal projects is unlike other renewable energy technologies, such as 

wind and solar, that can quantify their resources through comparatively inexpensive site 

assessments and accessible weather data. In contrast, geothermal projects can only verify the 

existence and quality of the resource through exploration drilling, which is expensive and may 

not result in a feasible project or one that produces as much power as originally estimated. 

Although the International Finance Corporation estimates that 59% of wells drilled during the 

exploration phase have been successful globally, the rate in the United States for well-researched 

and vetted sites may be in the range 35%–50% when economic and other factors are taken into 

consideration (IFC 2013; Speer 2012).3

 

It is also possible to leverage oil and gas drilling results to help identify geothermal resources. 

Some oil and gas projects may also be viable for geothermal co-production; however, coproduction projects are currently in the demonstration phase and may have more limited 

applications due to their remote locations and smaller capacity as compared to utility-scale 

hydrothermal plants. At the time of writing, ElectraTherm had commissioned the only coproduction geothermal power plant in the United States (GEA 2013). 

There is no singular definition of the phases for developing geothermal projects. For the 

purposes of this report, we chose to use the Geothermal Energy Association’s (GEA) description 

of the phases, which are outlined in Figure 1 (GEA 2010a). This report focuses on the first and 

second phases, which are collectively referred to herein as “exploration.”

 

3 The IFC (2013) defined successful wells as those with a potential of 3 MWe or greater, regardless of the potential 

return on investment of building a power plant at the site. Wells with a potential less than 3 MWe were also 

considered successful if connected to a currently operating power plant.
3 

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Figure 1. U.S. Geothermal Energy Association’s terms and definitions for geothermal resource development (2010a)

Phases I and II. Resource 

Procurement, Identification, 

Exploration, and Confirmation

•Literature survey

•Geologic mapping

•Geochemical and 

geophysical surveys

•Internal transmission 

analysis

•Land lease acquired

•Permitting for exploration 

drilling

•Temperature gradient 

holes drilled

•Slim hole approved and 

drilled

•One full-sized discovery 

well drilled

•Interconnection 

application submitted

•Transmission feasibility 

studies

•Permit for production well 

approved.

Phase III. Permitting and Initial 

Development 

•At least one full-sized 

production well and one 

full-sized injection well 

drilled

•Reservoir characterization 

complete

•Interconnection feasibility 

study complete

•System impact study

•Interconnection facility 

study

•Transmission service 

request submitted

•Plant permit application

•Power purchase 

agreement 

•Financing secured or 

being secured for power 

plant construction.

Phase IV. Resource Production 

and Plant Construction

•Plant equipment on 

order 

•Plant permits approved

•Contract signed with 

construction contractor

•Plant construction 

underway

•Production and injection 

well drilling

•Interconnection 

agreement signed

•Transmission system 

service request studies 

complete

•Plant permits approved

•Power purchase 

agreement secured.
4 

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The outcome of Phases I and II determines the future of the project. The full range of activities 

required to confirm a potential geothermal resource, including drilling a single full-sized 

discovery well to determine the presence and quality of the geothermal resource, can cost $6 

million to $10 million (Project Finance 2010). The probability that the well will be dry or 

partially dry (i.e., the temperature and flow-rate are too low to meet generation targets) is 

considerable (Salmon et al. 2011). If the resource cannot be proven or it is otherwise insufficient 

for the project’s needs, the project must be abandoned and investor capital is lost. 

The challenges of the exploration phases are exemplified by the consistently larger number of 

projects in Phases I and II starting in 2010 compared to the number of projects in later phases of 

development (e.g., Phase III and beyond) (see Figure 2.) This backlog of projects could be due in 

part to the exploration risk and subsequent financing challenges that may be preventing the 

projects reaching the next stage of development (NREL analysis; GEA 2013). 

Figure 2. Total projects by year and phase (including unconfirmed projects) (GEA 2013)4

1.2 Purpose and Scope

This report focuses on hydrothermal technologies as they are the most commercialized in the 

United States; we do not focus on other innovations, such as enhanced geothermal systems 

(EGS) and co-production. Because of their unique risk profile, hydrothermal geothermal projects 

benefit from different policy structures than other renewable energy technologies to support their 

 

4 See Figure 1 for a definition of Phases I, II, III, and IV. When a developer gains access to a geothermal resource 

but has not yet completed the steps to qualify as a phase I, this is termed as a “prospect.” Note that the 2008 and 

2009 GEA surveys did not report the project phases.
5 

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deployment. The purpose of this analysis is to help inform policymakers of options that could be 

used to support geothermal exploration based on previous policy experiences, including those 

outside of the United States. We have focused on the five general policy types noted below 

because they are believed to have the most applicability to the U.S. policy context. With the 

exceptions of drilling insurance and government-led exploration, all other policies can support 

other phases of geothermal activity (not just exploration); however, these same policies can be 

designed to specifically encourage geothermal exploration. Note that several countries have 

customized policies to suit the needs of their geothermal markets and deployment goals, and in 

doing so, have created hybridized structures that are described in greater detail in the country 

sections included later in this report.

• Loan guarantee—A government or other public entity provides a guarantee of debt 

repayment to a lender in the event of borrower default; a loan guarantee does not provide 

for a loan itself. 

• Drilling failure insurance—The developer pays a premium to access a governmentprovided partial-cost reimbursement in the event of a drilling failure or a less-thanexpected level of success.

• Lending support mechanism—A government entity reduces the cost of a loan in a 

variety of ways. The government can work with a private lender to provide a loan 

program and can buy down the interest rate charged. Other options include longer interest 

rates, interest-free periods, and payment-free periods, all of which would likely apply 

only under a government-provided loan program. 

• Grants and Cooperative Agreements—These include cost-sharing schemes or other 

forms of direct payment intended to reduce the investment cost during early-stage 

development. 

• Government-led exploration—A government entity leads, partners, or contracts work to 

identify and prove new geothermal resources. The proven resource may be subsequently 

transferred (e.g., via a tendering process) to a private sector entity for project 

development, operation, and/or ownership. 

We deemed some countries’ policies to be highly unlikely or impractical in the U.S. market and 

policy context, and thus omitted them from this report. For example, the Government of Kenya 

has compensated for a general lack of private investment in the country by operating a 

nationalized geothermal development company that is largely capitalized with aid funding (with 

additional funds deriving from national tax revenues). 

This report also discusses three multilateral agency programs that include risk mitigation 

instruments whose design could be replicated by the United States. Although these programs 

were or are funded by donors and are intended to spur development in less-developed countries, 

they nonetheless provide an instructive example of how to address geothermal resource risk. 

Furthermore, some of the countries discussed in this report have a very small amount of 

identified hydrothermal resources (e.g., Australia, Germany, and France) and have designed their 
6 

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policies to support geothermal heat projects and/or enhanced geothermal systems (a technology 

that is, as of this writing, not yet fully commercialized).5 We have included these countries and 

their policies in the analysis because the policy structures are relevant to hydrothermal 

applications in the U.S. market. 

1.3 Report Organization

Section 2 begins the analysis with an overview of the countries discussed in this report. Each 

country is assessed according to the following: 

• Installed geothermal capacity 

• Estimated geothermal resource potential 

• Proportion of geothermal capacity to total installed capacity 

• Sources of financing and utility regulatory context 

• Current policy mechanisms supporting geothermal project development. 

Section 3 looks further into the U.S. context with a brief history of its support of geothermal 

development at the federal level, including exploration policies. 

Section 4 provides conceptual descriptions of each of the five general policy types. Here, we 

describe the abstracted form of these policies, separate from their practical applications. The 

organizing principle of this section is “leverage” or the level to which a policy can incentivize

private investment with public funds. 

Section 5 discusses the in-country applications of the five policy types. This section is organized 

by country instead of policy type (as is Section 4) because in practice, the divisions between 

these policies are not always clear or countries have employed multiple policies, making it 

difficult to categorize a country under a single policy. 

Section 6 assesses the characteristics of the five policy types (according to megawatts deployed 

and private investment leveraged), bringing together insights from the case studies examined in 

Section 5 and analyzing each policy’s applicability to the U.S. policy context. 

Section 7 provides suggestions on innovative policies that could support geothermal exploration, 

concludes the report, and proposes areas for further research.

 

5 Ormat Technologies put into service the first grid-connected geothermal plant powered by an enhanced geothermal 

system in April 2013 (EERE 2013). The plant has an estimated capacity of 1.7 MW.
7 

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2 Country Context

Table 1 summarizes the political, economic, and geothermal market context for each of the 

countries discussed in this report, as well as the policy types that have been used within 

the countries. 

It should be noted that five of the top ten countries in terms of installed geothermal capacity are 

not included below because we could either not identify any exploration policy regimes or those 

regimes were deemed not applicable to the United States due to the structure of the U.S. electric 

utility sector and the institutions that are available to provide incentives. These five countries not 

included, in order of installed capacity, are the Philippines, Mexico Italy, El Salvador, and Costa 

Rica (BNEF 2012). The Philippines is not included in the main analysis because the state-owned 

national oil company developed nearly all of its existing geothermal capacity. However, a 

description of the Philippines’s geothermal development is included in Appendix A because the 

country recently privatized the national oil company and enacted a number of policies designed 

to support geothermal development along with other sources of renewable energy. Also included 

in Appendix B is a brief discussion of the Government of Kenya’s unique approach to 

geothermal exploration led by a state-owned enterprise. We were unable to identify the policy 

regimes Italy, El Salvador, and Costa Rica. And as of the time of writing this report, Mexico was 

formulating but had not yet enacted a program to provide insurance and financing for geothermal 

exploration activities; for more information, 

see: https://www.climateinvestmentfunds.org/cif/sites/climateinvestmentfunds.org/files/Mexico

%20Geothermal%20Risk%20Mitigation%20Facility%20-%20public.pdf. 
8 

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Table 1. Summary Information for Countries Examined Herein

Country and 

Installed 

Capacity Rank

Geothermal Information Background Exploration 

Support Type

United States

 1st 

Installed Capacity The United States has a patchwork of deregulated and regulated electricity markets in 

which power prices are determined by a host of market forces, regulations, and policies. 

Utilities and power generators can be government-owned or privately held, however most 

geothermal power generators are privately developed and owned and operated. The 

federal government has advanced geothermal project development by supporting

exploration activities for hydrothermal resources in the 1970s and 1980s and has since

provided a number of incentives and supporting policies. States and local governments 

have also supported geothermal projects; however, these policies are outside the scope 

of this report.

Loan guarantee;

lending support 

mechanisms; 

grant. 

3,386 MW

Hydrothermal Resource 

Potential

39,090 MWa

Percentage of

Total Power Grid 

Capacity

~0.2%b

Indonesia

3rd 

Installed Capacity Indonesia’s state-owned utility, PT PLN, has a monopoly on electricity distribution and 

pricing (DOS 2012). Geothermal development is decentralized, with the main developers 

being state-owned enterprises. However, public-private joint ventures and private 

companies are increasingly undertaking development activities. 

Government-led 

1,002 MW exploration. 

Resource Potential

27,510 MWc

Percentage of

Power Grid Capacity

3%d

New Zealand

6th

Installed Capacity Due in part to the abundant resource, geothermal power is a significant source of 

electricity in New Zealand. The country generated 13.7% of its power from geothermal 

plants in 2012 (Ministry of Economic Development 2013). Although two of the five power 

producers in New Zealand are now private firms, most of the country’s geothermal 

exploration occurred as the result of government-led efforts (GeothermEx 2010).

Government-led 

exploration. 731 MW

Resource Potential

Additional 1,100 MWe

Percentage of

Power Grid Capacity

7.5%f

Iceland

7th

Installed Capacity Iceland has a competitive electricity market, although the state-owned firm Landsvirkjun 

dominates wholesale electricity production with an almost three-quarter market share. 

Nearly 100% of Iceland’s power comes from renewable sources, with about one-quarter of 

that deriving from geothermal production (Orkustofnun 2011).

Grant;

government-led 

exploration. 670 MW

Resource Potential

4,300 MWg

Percentage of

Power Grid Capacity

22%

Japan

8th 

Installed Capacity Japan has a deregulated and liberalized electricity sector. Ten regional utilities are 

responsible for the country’s electricity supply and cooperate via the Federation of Electric 

Power Companies of Japan to promote a stable and efficient national power system. In 

Grant; 

government-led 

exploration. 535 MW

Resource Potential
9 

This report is available at no cost from the National Renewable Energy Laboratory (NREL) at www.nrel.gov/publications.

Country and 

Installed 

Capacity Rank

Geothermal Information Background Exploration 

Support Type

23,500 MWh 2012, the country was powered by 90% fossil fuels. However, the recently implemented 

feed-in tariff is expected to spur the renewable energy market (DLA Piper 2012). Percentage of

Power Grid Capacity

~0.2%i

France

18th 

Installed Capacity France has a liberalized and deregulated electricity sector that is the second-largest in the 

European Union (behind Germany). Although the country does not have significant 

conventional geothermal potential in its mainland territory, it does feature the oldest 

drilling insurance scheme in Europe (developed in 1982).

Despite the lack of conventional geothermal resources for power generation on mainland 

France, the country hosts a prominent enhanced geothermal system research and 

development facility in Soultz-sous-Forets that includes an operating power plant.

Drilling failure 

insurance; 

grant. 15 MW in Guadeloupe; 

no electricity production 

on mainland

Resource Potential

Low for hydrothermal

Percentage of

Power Grid Capacity

Less than 0.2%j

Germany

22nd

Installed Capacity The German power market is the largest in Europe (Maroo 2012). The country is a 

worldwide leader in renewable deployment, generating nearly 20% of its electricity from 

renewable resources, though geothermal power represents only a marginal fraction of this 

percentage (GEA 2012a). The German government is increasing its support for 

geothermal development—both in domestic and foreign markets—with lending programs 

through its development bank, Kreditanstalt für Wiederaufbau Bankengruppe (KfW), and 

premium feed-in tariff rates.

Loan guarantee; 

lending support 

mechanism. 7.3 MW

Resource Potential

Low for conventional 

hydrothermal

Percentage of

Power Grid Capacity

Less than 0.1%j

Australia

25th

Installed Capacity Most of the electricity in Australia is delivered through two large electricity markets and 

two vertically integrated utilities. Currently, the country has minimal geothermal power on 

its grid with an installed capacity of 0.1 MW. However, in 2009 Australia offered a grant 

designed specifically to cover a portion of the cost of exploration drilling. Due to a lack of 

hydrothermal resources, this subsidy is suited toward the development of enhanced 

geothermal systems, as demonstrated in the Geodynamics-Gooper Basin project 

discussed with Bendall et al.

m However, the design of the grant itself could apply to the full 

range of geothermal energy uses, including conventional hydrothermal. The grant is no 

longer available.

Grant. 

0.1 MW

Resource Potential

Low for hydrothermalk

Percentage of

Power Grid Capacity

Less than 0.01%l

All installed capacity figures are from GEA (2012a) except figures for the United States, which are from GEA (2013); France, Germany, and Australia, which 

are from BNEF 2012; and New Zealand, which is from Ministry of Economic Development (2012). 

Figures for geothermal potentials and percent of total capacity derive from: a

Williams et al. 2008; bEIA 2012; cGEA 2012a; dDarma et al. 2010; eHarvey et al. 

2010; f

Ministry of Economic Development 2012; gÍslandsbanki 2010; hAkeno and Sugino 2010; iGEA 2012a; jEIA 2013; kGeothermEX 2010; lBeardsmore and 

Hill 2010;, and mBendall et al. 2013.
10 

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3 Background on U.S. Federal Geothermal Power

Policies Supporting All Phases of Development

The United States leads the world in installed geothermal capacity with 3,386 MW. To reach this 

point, national and state government agencies employed a number of supporting policies and 

financial incentives ranging from loan guarantees and tax credits to direct subsidies. During the 

1970s, 1980s, and early 2000s, the federal government enacted a number of policies and 

incentives that helped jump start—and then advance—the geothermal industry. These included: 

• The first federal loan guarantee program begun in 1974 (Nasr 1978; Doris et al 2009; 

Speer 2012). Lead agencies: Energy Research and Development Administration and later 

the Department of Energy 

• The Public Utilities Regulatory Policies Act begun in 1978 (Owens 2002; Doris et al. 

2009). Lead agency: Federal Energy Regulation Commission with some responsibilities 

delegated to states

• The investment tax credit (ITC) begun in 1978 (Doris et al. 2009; Speer 2012). Lead 

agency: Department of Treasury

• The Industry-Coupled Case Studies Program begun in 1978 (Moore et al. 2010; Speer 

2012). Lead agency: Department of Energy

• The production tax credit (PTC) begun in 2005 (Doris et al. 2009; DSIRE 2012; Speer 

2012). Lead agency: Department of Treasury. 

Most of these programs supported renewable energy development more generally; however, 

federal programs specifically relevant to the exploration drilling (including the loan guarantee 

and Industry-Coupled programs briefly mentioned here) are presented in more detail in 

Section 5.1. 

In addition to these older programs, the federal government has enacted or revised a number of 

policies and incentives since the mid-2000s that provide support to geothermal projects, both in 

general and potentially to the exploration phase more specifically. These programs were:

• The Section 1703 Loan Program enacted in 2005 and its extension, the Section 1705 

Loan Program enacted in 2009 

• The Bureau of Land Management’s Programmatic Environmental Impact Statement for 

Geothermal Leasing in the Western United States, intended to help streamline the federal 

leasing system and define a set of best practices for hydrothermal development in the 

western United States (Doris et al. 2009) 

• The ITC, PTC, and changes to these programs including the 1603 Treasury Grant (Speer 

2012) 

• Support for innovative early-stage drilling technologies through the Recovery Act and 

DOE Funding Opportunity Announcement #0000522. 
11 

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4 Policy Descriptions

Below, we define five generic policy types that are commonly used to spur renewable energy 

deployment in general and, in some cases, geothermal development in particular. Importantly, 

we have categorized these policy types by their relative leverage or the degree to which public 

expenditures can attract private investment. 

For example, in the case of a loan guarantee program, the government does not actually set aside 

capital equal to the amount of the private loans that are being backstopped. It merely has to set 

aside enough capital to cover the probability of defaults in the entire portfolio of guaranteed 

projects (Mendelsohn 2010). In contrast, when the government assumes the full responsibility of 

drilling wells and does not incentivize the private sector to do so, the government is accountable 

for the full cost contributed, not including any exploration activities undertaken by private sector 

developers (i.e., the exploration could be a joint effort). It is important to note that actual 

leverage will depend on the specifics of individual policy design. 

Finding a balance between leverage and subsidy levels is important because if a subsidy is too 

high and does not leverage private funds, as in the case of government-led exploration, public 

funds may be overcommitted and expended rapidly. On the other hand, if a subsidy is too low, 

very few investors may take advantage of the policy because it may not sufficiently reduce 

exploration risks. 

Due to the emphasis in the United States on market-driven policies with minimal government 

expenditures, we assessed policies primarily by their ability to leverage private investment. 

There are several additional ways to assess the effectiveness of a policy, such as total cost, 

installed capacity, market growth, increase in capital flows, and barrier mitigation. While 

considering the following analysis of each policy type, it may be helpful to keep in mind that 

leverage is not the exclusive indicator of policy success.

Table 2 orders the five main policy types analyzed by leverage; the rankings are purely 

conceptual and do not account for any modifications in policy design or measurements of actual 

impact. 

Table 2. Illustrative Qualitative Assessment of Leverage Capability by Policy

Low Leverage Medium Leverage High Leverage

Government-led exploration: Low; 

government incurs full cost of 

exploration and investment forfeiture 

in the case of dry wells

Lending support mechanisms: 

Medium; interest from the loans 

could help defray costs, provided 

that the default rate remains low

Loan guarantee: High in the case of 

limited guarantee payouts

Drilling failure insurance: High in 

the case of limited claims

Grants and cooperative agreements: Medium to low; represent a liability in 

either the case of direct payouts or foregone tax income

a The assessments of leverage provided here are general comparisons across the five policy types. Actual leverage 

will depend on the specifics of policy design.
12 

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4.1 Loan Guarantees 

Loan guarantees are one type of credit enhancement that can strengthen a borrower’s ability to 

take on debt by improving the project’s risk profile. Loan guarantees involve three parties: the 

borrower, the lender, and the guarantor. In the case of a government policy, the guarantor is 

usually a government agency or public financial institution. In the event the borrower defaults on 

debt payments, the guarantor pays off the remaining loan to the lender on behalf of the borrower, 

usually up to some agreed-upon limit (e.g., 80% of the total loan value). Depending on the policy 

structure, the guarantor may obtain ownership of project collateral in a default situation as a 

means of offsetting the cost of the loan repayment. 

Loan guarantees and loan forgiveness are similar policies with some distinctions between them 

from a policy perspective, but could both be considered. From the perspective of the borrower, 

loan forgiveness is similar to a loan guarantee. Under a loan forgiveness program, a government 

provided loan could either be repayable no matter the outcome of exploration drilling, or 

partially or fully forgivable in the case of unsuccessful drilling. This can take the form of a loan 

being transformed into a grant (in which case, no payment is required). An example can be found 

in Germany’s “Risk of Non-Discovery of Deep Geothermal Energy” program, described in detail 

in Section 5.3. Thus, under either type of program, the borrower is no longer obligated to repay a 

portion or all of a loan in the event the project is “unsuccessful” as defined by a given program. 

As best as possible, loan guarantee programs need to accurately assess the risk of default to 

ensure loan defaults can be covered and also to accurately communicate the potential cost of the 

program to the public. 

4.2 Drilling Failure Insurance

Drilling failure insurance—also referred to as geologic risk insurance or exploration risk 

insurance—transfers risk from one party (the originator of the risk) to another (the insurer) in 

exchange for payment of a premium that reflects the probability of a loss occurring because of 

that risk. In the case of geothermal drilling, the developer collects a payout if exploration drilling 

is unsuccessful per a predetermined definition of success. By shifting some of its risk exposure 

away from its balance sheet, the original party has preemptively managed, in theory, a portion of 

its potential losses. Financiers that are confident their investments are partially backstopped by 

creditworthy entities (e.g., a reputable private insurer or national government) may be more 

likely to furnish capital (and perhaps on more favorable terms) than would be possible without 

the insurance.6

 

A drilling failure insurance program can be a potentially high-leverage policy option, provided 

the insured pool of projects have a success rate that is as high or higher than anticipated (and thus 

revenue from premiums collected cover all claims). Similar to loan guarantees, administrators of 

drilling failure insurance programs also need to plan for the expensive due diligence process to 

assess the project risk; however, this could be covered as part of the premium. 

 

6 Traditional commercial lines of insurance, such as property and liability policies, do not necessarily function as 

credit enhancements. These policies are required as per the project’s contracts (e.g., feed-in tariff and financing 

agreement), and development will not proceed without them in place.
13 

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4.3 Lending Support Mechanisms

Lending support mechanisms, or “soft” loans, directly reduce the cost of financing as compared 

to loan guarantees and drilling failure insurance, which indirectly reduce the cost of capital. Like 

loan guarantees, lending support mechanisms involve a third party, which can be a government 

agency, public financing institution, or a development bank. The third party provides some form 

of a capital transfer to the lender for reducing the borrower’s financing costs. As discussed in 

Section 3.1, lending support mechanisms may not provide as much leverage for private 

investment as loan guarantees or drilling risk insurance; funds are generally paid out regardless 

of the loan’s performance and thus are unrecoverable funds. However, lending support 

mechanisms could be an effective way to spur market development and thus may leverage a 

large amount of private investment. There is the potential with lending support mechanisms that 

financiers may have a conflicting incentive to charge higher rates on top of the government 

subsidy. Checks must be in place to ensure the borrower is actually obtaining a lower financing 

cost. 

There are multiple ways to subsidize both public and private loans, including the following: 

• Private loans 

o Interest rate buy-downs in which a public entity pays a portion of the interest rate 

required by the private lender

• Government-provided loans 

o Lower interest rates, which can be provided via a direct loan from a public entity 

o Interest-free periods during which no interest accrues on the outstanding capital 

o Payment-free periods in which the borrower makes no payments to the lender, 

although interest may continue to accrue

o Longer loan terms than what could be found in the private market, thereby 

reducing payment levels (although the cumulative interest cost could be higher 

with a longer amortization period) 

o Repayment bonuses or small grants that are received as a reward for timely 

repayment of a loan. 

4.4 Grants and Cooperative Agreements

Grant and cooperative agreement programs (grants), unlike drilling failure insurance or loan 

guarantees, immediately reduce the private investment required for the high-risk exploration 

phase. Furthermore, grants are less risky to the project developer than tax incentives. The 

developer receives the value of the incentive right away, which is not dependent on the 

developer’s future, unknown income levels in order to monetize the incentive. Generally, grants

can take the form of direct grants of a set amount or a cost-share that covers a predetermined 

percentage of total exploration costs. 

Another type of grant is a repayable grant. A repayable grant is similar to loan forgiveness and is 

repaid to the government entity in the event a project meets a predetermined level of success. By 

recouping public funds when a well is successful, this method can help increase the leverage and 
14 

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sustainability of the program. However, it may provide a disincentive for fully developing a 

project if it is on the borderline of being successful and depending on the level of the grant. Thus, 

the grant must be high enough to incentivize risk taking without being so high that it is more 

lucrative to take the grant than to develop a project.

Some grants may come with stipulations or conditions. Matching-funds requirements oblige the 

developer to raise a predetermined ratio of outside investment, leveraging the public outlay. In 

another example, programs may require developers to provide data about the hydrothermal 

resources encountered during the exploration process for the dual purpose of: (1) lowering the 

risk of future exploration and (2) improving industry processes and technologies. Stipulations 

and conditions can help government agencies address goals beyond simply drilling more wells. 

But these same requirements can also make the exploration process more onerous and expensive 

for the project developer. 

4.5 Government-Led Exploration

A government ministry, agency, or government-run utility may contract work to private industry 

to identify and explore a geothermal resource. Likewise, a government-run utility could 

undertake this work directly. Subsequently, the government entity may either: 

• Issue a tender for a private developer to build and operate a power plant at the site of a 

proven resource or do so itself 

• Execute land lease agreements with developers if an identified but unproven resource is 

on public lands. 

With a government-led exploration program, the government may pay only a portion or all of the 

exploration expenses. 

The goals of direct government participation in geothermal exploration may vary. One goal 

could be to reduce barriers to private investment by reducing or eliminating the risks of the initial 

resource identification and exploration phases and may be applied when the risks are perceived 

to be too high to be addressed by other policies. Another goal could be that of the governmentrun utility wanting to add to and diversify the energy mix, address unmet power demands, or 

operate a profitable enterprise. 
15 

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5 Exploration Policy Case Studies

The following section presents select case studies of the policies that are the focus of this report. 

These case studies were selected based on their applicability to the U.S. market and are 

organized by country rather than by policy type as some countries have implemented multiple 

policies. Each sub-section begins with a brief summary of the geothermal market in the 

particular country to provide contextual detail and then discusses the primary details of the 

policies involved. 

A number of these examples do not correspond directly to the stylized policies presented above. 

Some illustrate the different ways that the five main policy types have been combined or adapted 

to specific national contexts. 

In Section 6, we discuss the policy examples together and the applicability of the various policy 

types to the United States. 

5.1 United States: Loan Guarantees, Lending Support Mechanisms,

and Grants and Cooperative Agreements

The United States has an installed capacity that exceeds that of any other country by more than 1 

GW. Most existing hydrothermal power plants in the United States are concentrated in California 

and Nevada, but significant resources remain untapped in these and other states. The U.S. federal 

government and some states have attempted to support additional capacity additions with a 

variety of policies designed to incentivize private sector development beyond what might occur 

solely due to market forces. 

The policies described below are those that have directly or indirectly provided support to the 

exploration phase of the project development cycle; a fuller list is included in Section 3. Though 

the United States has implemented several other measures to support the geothermal market (see 

Section 3), the focus of this analysis is policies specifically applicable to the exploration phase.

7

For example, from 2009 to 2011, projects were eligible for the 1603 Treasury Cash Grant but 

could only receive the grant after becoming operational.8

 

The list of policies included within this report is not intended to be comprehensive, but rather it 

highlights a few key programs that are most relevant to the scope of the report, which focuses on 

policies to encourage the private sector’s exploration of geothermal resources. For example, we 

do not include a discussion of the Program Research and Development Announcement because it 

focused on feasibility studies only (Lund et al. 2012). We also do not include analysis of the 

 

7 Additional policies implemented at the federal level in the 1970s to support geothermal (and other renewable 

energy technologies) included research, development, and deployment funding; the Public Utilities Regulatory 

Policies Act; and an investment tax credit (Doris et al. 2009). 8 A project is operational once it is online and feeding power into the grid or directly to an end-user at the full level 

of intended capacity.
16 

This report is available at no cost from the National Renewable Energy Laboratory (NREL) at www.nrel.gov/publications.

state-coupled case studies program as it provided support to states and universities, whereas the 

focus of this report is public-private partnerships.9 

The United States has provided two loan guarantee programs: one direct loan program, and one 

cost-share grant both of which could have been applicable to the exploration phase of 

hydrothermal geothermal projects. Additionally, the federal government has supported 

exploration for geothermal heat and combined heat and power projects. We have included these 

programs because the support mechanism may be applicable to supporting exploration activities 

more broadly, regardless of the intended end-use. We have omitted a discussion of the Section 

1703 Loan Program in this section because it has not supported any geothermal projects to 

date,

10 and because we do explore the Section 1705 program, which is similar to the 1703 

program in its design. 

Table 3 summarizes the programs that are reviewed in greater detail within this section.

Table 3. U.S. Loan Guarantees, Lending Support Mechanism, and Grants and Cooperative 

Agreements

Year Policy Name Notes

Loan Guarantees

1974 Loan “Guaranty” 

Program

The original geothermal loan guarantee program was enacted with passage of the 

Geothermal Energy Research, Development and Demonstration Act in an attempt to 

catalyze private lending to geothermal projects.

2009 Section 1705 Loan 

Program 

This program was enacted by the Recovery Act as an addition to the 1703 Loan 

Program. The 1705 program was originally funded with $6 billion, but this amount was 

later reduced to $2.5 billion and included some modifications compared to the 1703 

program. 

Lending Support Mechanisms

1980 Loans for 

Geothermal 

Reservoir 

Confirmation 

Program 

Authorized by Congress, the program was intended to provide exploration loans to 

both geothermal power and heat projects. Power projects could borrow a maximum of 

50% of project costs, but they were not to exceed $3 million. Although authorized, the 

program never received congressional appropriations.

Grants and Cooperative Agreements

1977 Program 

Opportunity Notices 

(PONs) 

This program offered a cost-share to geothermal heat projects for exploration drilling 

and the demonstration of geothermal energy uses, including combined heat and 

power.

1978 Industry-Coupled 

Case Studies 

Program 

This cost-share mechanism covered 20% to 50% of the exploration and reservoir 

confirmation costs. In exchange, developers had to provide drilling and well data.

1980 User-Coupled 

Confirmation Drilling 

Program 

Along the same lines as the Industry-Coupled program, the User-Coupled program 

provided cost-share grants to conduct exploration drilling for geothermal heat 

projects. The government’s portion of the expenses ranged from 20% to 90%, 

depending on the degree of success achieved in the drilling.

 

9 For more information on these and additional exploration programs, such as the Geothermal Resource Exploration 

Development and Cascades Cost-Share, 

see: http://www1.eere.energy.gov/geothermal/pdfs/geothermal_history_1_exploration.pdf. 10 The reason the 1703 program has not supported geothermal projects is likely because conventional geothermal 

projects are not considered “innovative clean technologies” as required by the program guidelines.
17 

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5.1.1 1974 Geothermal Loan Guaranty Program

In the 1970s, geothermal projects struggled to access commercial loans because lenders were 

reluctant to invest in an unfamiliar technology (Owens 2002). The original geothermal loan 

guaranty program was enacted in 1974 with passage of the Geothermal Energy Research, 

Development, and Demonstration Act (Bloomquist et al. 2005; DOE GTP 2012b).11 It was 

created to address this reluctance among private industry investors by having the federal 

government share the risk of early-stage geothermal project development (Owens 2002). The 

program, which came into effect June 25, 1976, was the first loan guarantee in the United States

to support the development of energy resources (Nasr 1978). Specifically, it was established to 

underwrite loans for the: 

1. Determination and evaluation of the resource base 

2. Research and development with respect to extraction and utilization technologies 

3. Acquisition of rights in geothermal resources 

4. Development, construction, and operation of facilities for the demonstration or 

commercial production of energy using geothermal resources 

5. Construction and operation of new commercial power plants. 

Step 1, the “determination and evaluation of the resource base,” could have included exploration 

efforts, and others have suggested that supporting exploration activity was in fact one of the 

objectives of the program (Nasr 1978). However, no exploration projects were supported under 

this program. 

In 1978, Congress amended the 1974 Geothermal Energy Research, Development and 

Demonstration Act with the passage of the Technical Amendments to the Geothermal Energy 

Research, Development, and Demonstration Act. The amendments included raising the 

maximum guarantee amount to $100 million per project (for a total of $200 million per 

borrower) and pledging the “full faith and credit of the United States” for payment of the 

guaranties (Nasr 1978).12 

Projects were given priority consideration for loan guarantees if they: 

• Held the possibility of rapid energy production from geothermal resources 

• Demonstrated or used new technologies 

• Demonstrated or exploited new geothermal resource areas with commercial potential. 

 

11 This Act provided several other important programs to support the U.S. geothermal market. Title I included a 

provision for the “Geothermal Energy Coordination and Management Project to conduct resource inventory and 

assessment; conduct research and development; initiate a program to design and construct geothermal 

demonstrations plants; and provide for scientific and technical education programs through the National Science 

Foundation” (Nasr 1978). In addition to the loan guaranty program, “Title I provides for the establishment of ... 

assistance in the payment of interest charges, and establishment of the Geothermal Resources Development Fund” 

(Nasr 1978).

12 Although the reason for including the “full faith and credit of the United States” clause in the amendment is not 

known, it was likely done to indicate to lenders and investors the unconditional guarantee that would be provided by 

the federal government in the event of borrower default.
18 

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Although the program was designed to support exploration activities, projects that proposed 

geological or geophysical exploration or the acquisition of land or leases received lower priority 

when being considered for loan guarantees (Nasr 1978). More information on why this occurred 

could not be found, although it could have been due to the perceived risks and the related longer 

project development times. Additional prioritizations were applied that could have impacted the 

ability of exploration projects to access guarantees (Nasr 1978). 

Under the program, the maximum loan term was the lesser of 30 years or “the expected average 

useful life of any major physical asset to be financed by such [a] loan” (Nasr 1978). Originally, 

the program guaranteed 100% of loans for up to 75% of projects costs, with the applicant 

contributing the remaining 25% of capital as equity (Nasr 1978). The program was amended in 

1980 to guarantee up to 90% of costs (Bloomquist et al. 2007). This decrease in the equity 

requirement was likely intended to address the issue—raised by industry during the U.S. House 

of Representatives’ Sub-committee on Energy Research, Development, and Demonstration 

meetings on the geothermal loan guaranty program—that the 25% equity requirement had been 

unappealing (Nasr 1978). 

The coverage ratio for the program was originally 1:4 and was later reduced to 1:7 by the 

appropriations committee (Nasr 1978).13 We could not determine why the appropriations 

committee altered the coverage ratio. It is possible the committee chose to increase the leverage 

of public to private dollars to support additional projects. 

In addition to the minimum equity requirement, developers supplied project data, and lenders 

submitted financial reports as part of the guarantee application. Relevant project data included 

environmental reports; geological, geophysical, and geochemical data; well data; the utilization 

process; financial information about the firm; project economics; management capabilities of the 

firm; a milestone plan describing the project goals; marketability of the resources; legal data 

concerning the project’s assets, leases, pending litigation, patents, and permits; and the structure 

of the organization (Nasr 1978). The loan guarantee application included a description of the 

management experience of project staff; audited financial statements; the loan agreement; and 

the lender’s assessment of the borrower’s loan application. Developers could have included 

multiple site locations in an application (Nasr 1978). 

As of February 1978, three loan guaranties had been issued and six applications were under 

review (Nasr 1978). An estimated 38 additional loans were being prepared with another 12 

potential applicants (Nasr 1978). At the conclusion of the program, eight guaranties had been 

granted (DOE IG 1987). Thus, it seems likely that a significant number of applicants were either 

not granted guarantees or that applications were rescinded by the developers. The program was 

scheduled to expire in 1984 and was ended due to a lack of congressional appropriations 

(Bloomquist et al. 2007; GAO 1980).14 

 

13 The coverage ratio is the amount of funds allocated per loan to cover one potential failed loan; it represents one 

way to understand the perceived risk profile for a given loan guarantee program. The coverage ratio is akin to what 

is known as the “credit subsidy cost” under the present-day loan guarantee programs. The credit subsidy can be 

covered either by appropriations or a fee paid by the borrower (DOE LGP 2012). 14 Information could not be found concerning when the last guarantee was made or exactly when the program ended.
19 

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Although the original loan guarantee program did support some geothermal development, several 

projects defaulted on loans, thereby requiring the federal government to make the loans whole 

(Bloomquist et al. 2007). In all, DOE backed $178 million in defaulted loans from three of the 

eight projects that received loan guaranties. These projects are outlined in Table 4. For a 

complete list of geothermal projects that received cost-share or loan guarantee support, see

Bloomquist et al. 2007. 

Table 4. Geothermal Project Defaults on Original U.S. Loan Guaranty Program

Project Date of Loan 

Guarantee

Date of 

Default

Amount Project 

Capacity

Type

Westmorland 

Development 

Project

1979 1984 $29 million 55 MW Exploration and field 

development/electrical

CU-1 Venture 1980 1984 $49.4 million Unknown Exploration/electric

Niland 

Development 

Project

1984 1985 $99.6 million 49 MW Electrical

Sources: Bloomquist et al. 2007; DOE IG 1987; GAO 1980

According to Nasr (1978), the original Geothermal Loan Guaranty program had a minimal effect 

on spurring geothermal development, the result being that response to the program in its first 

four years was much less than anticipated. Nasr argues that other policy changes, such as the 

streamlining of environmental regulations and the lease application and granting process, as well 

as the granting of tax write-offs and depletion allowances would have had a greater impact on 

geothermal development. Nasr (1978) also claimed that the guarantee program did not encourage 

any new projects that would have otherwise not happened without the guaranty—in other words, 

the loan guaranty program did not result in additional projects. Other policy changes occurred in 

the early 1970s, such as implementation of regulations for the federal leasing program, which 

were not completed until December 1973. The first lease sale was made in January 1974. 

According to Bloomquist et al. (2007), the two main limitations for the loan guarantee program 

were the:

1. Severe eligibility requirements that resulted in loan guarantees being granted to projects 

that would likely have qualified for conventional loans 

2. Reluctance by utilities to participate in the program due to concern about the impact of 

default on their credit ratings.

Nasr (1978) also noted several specific barriers to an effective loan guarantee program for 

geothermal exploration projects:

• Aversion to supporting risky, exploratory projects: Although the original program 

was established to support exploratory, high-risk projects that could otherwise not gain 

financing, the program itself considered the exploration projects to be too risky. 

However, no official regulations or laws stated that non-exploration projects should be 

given priority. 
20 

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o As an example, as of 1978, one exploratory project—the Beryl and Lund project 

under development by Geothermal Kinetics—applied for a loan guarantee. Project 

developers sought support for completing exploration work, drilling temperature 

gradient holes, and drilling a test well at each site. Geothermal Loan Guaranty 

administrators determined that these exploratory efforts were too risky, but the 

program did grant a guarantee for another Geothermal Kinetics site—the Brawley 

site in Imperial Valley, California, to support completion of test wells. 

• Long application timeframes: The average time for the three loan guaranties that went 

through the application process as of 1978 took 16 months, nearly 9 months of which was 

spent under government review. The application process involved a minimum of 26 

steps.

• Lack of formal application review procedure. 

• Administrative burden: The agencies tasked with implementing the program may not 

have had the organizational capacity to handle the administrative burden of reviewing 

applications within the timeframes prescribed by the program itself.

• Variances in application quality often required additional iterations to provide 

complete applications. 

• Absence of clear approval authority among the various organizations involved in 

the review process.

In addition to avoiding these barriers, loan guarantee programs in general are advised to establish 

secure and efficient mechanisms for obtaining collateral in the event of a loan default. An audit 

of the program by the DOE Office of the Inspector General reviewed the collateral procedures 

for the three defaulted loans and recommended that DOE (1) refer all cases to the U.S. Attorney 

General to maximize the value of collateral recovered and (2) prepare final plans to expedite 

recovery of collateral (DOE IG 1987). These recommendations were in response to long delays 

in recouping collateral from projects in default. The delays resulted in added costs and a decline 

in the value of the collateral. Accessing collateral quickly and without additional legal wrangling 

can help a program keep its overall total losses to a minimum. 

Under a loan guarantee for geothermal exploration, the ability to recover collateral could be 

limited because the developer has yet to obtain any significant assets, such as a power plant. 

Accounting for the limited collateral in the policy design of any loan guarantee targeting the 

exploration phase is important for determining the overall cost of the program and how the cost 

may need to be covered via other means, such as a fee paid by the developer.

5.1.2 Section 1705 Loan Program—2009

In 2009, Congress enacted the Section 1705 Loan Program when it passed the Recovery Act. 

The Section 1705 Loan Program supported commercialized clean energy projects and 

manufacturers as an addition to the Section 1703 Loan Program passed in 2005. The 1703 

program is omitted from this report, as it has not supported geothermal projects in the past and 
21 

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there is no expectation that it will in the future either (Speer 2012).15 The Section 1703 program 

is also similar to the Section 1705 program, and thus a description of one is deemed sufficient. 

Unlike the 1703 program, the Section 1705 Loan Program applied to conventional geothermal 

projects. The 1705 program provided for an important programmatic change: it allowed 

applicants to participate in DOE’s Financial Institution Partnership Program (FIPP). Under FIPP, 

a private industry lender is required to: (1) be the applicant, (2) fulfill the financial and other due 

diligence considerations, and (3) provide a certification to DOE that the application is accurate 

and complete (Pillsbury 2009). In other words, FIPP transfers much of the due diligence from 

DOE to the private industry lender, which has impetus to conduct accurate assessments due to its 

“skin in the game” with only 80% of the loan guaranteed. The program was originally funded at 

$6 billion, which was reduced to $2.5 billion after reallocations (Mendelsohn 2010). The 

maximum guarantee per project was $500 million (Recovery Act 2009). 

FIPP was targeted for commercial projects using relatively simple finance structures and those 

that had credit ratings of "BB" (S&P or Fitch) or "Ba2" (Moody's) (WSGR 2009; Mendelsohn 

2010). Projects were limited to 80% debt, and the program would cover 80% of the loan, or in 

other words, the program would cover up to 64% of the total capital (Martin 2009; Mendelsohn 

2010). Fees, including those for the application, facility, and maintenance for the program varied

by loan size but roughly equaled 1% of the loan amount (Mendelsohn 2010). 

For each guarantee, the federal government set aside a credit subsidy or a percentage of the total 

amount toward a pool of funds to cover any losses (Jaffe 2009; Mendelsohn 2010). The credit 

subsidy is estimated to have been between 6% and 10% of each loan amount, and thus it has 

been calculated that the program could have supported between $25 billion to nearly $42 billion

in total loans for all renewable energy technologies (Mendelsohn 2010). The program expired on 

September 20, 2011. 

As shown in Table 5, four geothermal projects were awarded loan guarantees under the 1705 

program; however, one developer retracted its application before it was complete. Two of the 

three projects that went through with the loan guarantee used FIPP, including the three bundled 

Ormat plants: Jersey Valley, McGinness, and Tuscarora. In all, the 1705 program could support 

180 MW of installed capacity and $545 million in loans for geothermal projects pending project 

completion. 

 

15 Section 1703 Title XVII of the 2005 Energy Policy Act provided for the Section 1703 Loan Program, which 

allows the federal government to ensure the repayment of loans for qualifying “innovative” clean technology 

projects, such as geothermal. However, only new technologies that have had “no more than three implementations 

that have been active for more than five years” are eligible. This requirement would seemingly make most 

geothermal projects ineligible for the 1703 program.
22 

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Table 5. Geothermal Project Recipients of Federal Loan Guarantees

Project(s) Developer Lender Program Amounta Capacity Issued

Blue Mountain Nevada Geothermal 

Power Co.

John Hancock 1705, 

FIPP 

$99 million - 

closed

36 MW 9/2010

Neal Hot Spring U.S. Geothermal Federal Financing 

Bank

1705 $97 million - 

closed

23 MW 2/2011

McGinness, 

Jersey Valley, 

Tuscarora

Ormat Nevada John Hancock 1705, 

FIPP 

$350 million

- conditional

121 MW 6/2011

RETRACTED:

Wister, CD-4, 

Dead Horse 

Wellsb

Ormat Nevada John Hancock 1705, 

FIPP 

$330 million 80 to 90 

MW

N/A

Sources: Brightenergy.org 2010; GEA 2010b; Scharfenberger 2011; Ormat 2010a; Ormat 2010b

Of the five plants supported by the three guarantees that proceeded, three plants (Blue Mountain, 

Tuscarora, and Jersey Valley) are in operation and two projects (Neal Hot Springs and

McGinness) are nearing completion (Neubauer 2012; GEA 2012; U.S. Geothermal 2012). It 

should be noted that both the Blue Mountain and Jersey Valley projects were already in 

development when granted the loan guarantee (Neubauer 2012; GEA 2012), and thus the 

guarantees did not support exploration efforts for those projects. Whether the loan guarantees 

supported or encouraged exploration for the other projects is unclear. However, the 1705 

program was capable of facilitating low-cost financing (e.g., a 4.14% interest rate for one project 

granted a guarantee) (Nevada Geothermal Power 2011). 

DOE awarded $545 million in loan guarantees to geothermal projects, while solar photovoltaic 

and concentrating solar projects received $13.5 billion under the 1705 program (Speer 2012). 

Possible reasons for the difference in amounts awarded include perceived high transactions costs 

by developers, disinterest among lenders to participate in the program, lack of geothermal and 

DOE program expertise on the part of lenders, and a perception of higher risk due to the pursuit 

of a loan guarantee (Speer 2012). Another possible reason for the limited use of the 1705 

program may have been the mismatch between the extended geothermal development process 

and the short timeframe for participation in the 1705 program (Speer 2012). In light of the timing 

mismatch of the 1705 program included in the Recovery Act, geothermal project developers and 

lenders may be able to better use future loan guarantees if they are available over a longer period 

of time. Also, projects need to be of a certain size to make economic sense given the added cost 

of going through the loan guarantee application process, which may deter smaller projects. 

5.1.3 Loans for Geothermal Reservoir Confirmation Program

Congress authorized the Loans for Geothermal Reservoir Confirmation Program, a direct loan 

program, in 1980. It was intended to provide loans to geothermal heat and power projects for 

surface exploration and drilling (Bloomquist 2005; Bloomquist 2007). Loans could not exceed 

$3 million and were limited to 50% of project costs for power projects. Despite being passed in 

the Energy Security Act of 1980 and authorized by the Secretary of Energy, the program never 

received congressional appropriations. 
23 

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5.1.4 Program Opportunity Notices

The PONs program offered by DOE in 1977 and 1978 was a cost-share exploration drilling grant

intended primarily for geothermal heat projects (Bloomquist 2005; Bloomquist 2007; Lund 

2012; Moore et al. 2010). Combined heat and power projects were also eligible. DOE received 

22 applications for the program and issued at least one PON for a geothermal power project, 

which was never completed (Moore et al. 2010). Interestingly, the one PON issued specifically 

for a power project included a provision permitting DOE to recover up to 50% of the grant from 

the revenues generated.

5.1.5 Industry-Coupled Case Studies Program

DOE implemented the Industry-Coupled Case Studies Program in 1978. The program had two 

main objectives. First, its cost-share mechanism helped facilitate geothermal exploration by 

offsetting some of the high initial costs and risk of exploration drilling. At the time, little was 

known about the locations of geothermal resources in the United States (Moore et al. 2010). To 

encourage exploration, DOE covered 20% to 50% of the exploration and reservoir confirmation 

costs for participating projects (Bloomquist 2005). Second, DOE wanted to gather more data on 

geothermal resources and projects for the purpose of increasing knowledge and thereby aiding in 

future geothermal power development (Moore et al. 2010). Thus, DOE required industry 

participants to provide the well and drilling data collected during the exploration process. 

During this program, industry partners evaluated 14 sites, eight of which resulted in geothermal 

power plants. As of 2010, seven of these plants were operating with a combined capacity of 137 

MW (Moore et al. 2010); it is possible more plants have come online since then. The program 

eventually lost congressional support and is no longer in operation. 

5.1.6 User-Coupled Confirmation Drilling Program

The User-Coupled and the Industry-Coupled programs served similar purposes but were offered 

for different end-uses. Through the User-Coupled program, DOE offered a cost-share grant to 

geothermal heat projects for a range of resource confirmation activities, including drilling 

(Bloomquist 2005; Bloomquist 2007; Lund 2012). The program offered to cover 90% of project 

costs in the case of completely unsuccessful drilling and 20% in the case of completely 

successful drilling (presumably based on the flow-rate and temperature of the geothermal fluid) 

(Bloomquist 2005). Specific information on how many grants were awarded and their value was 

not found. 

5.2 France: Drilling Failure Insurance and Grant

The geothermal market in France is geographically fragmented. All of France’s conventional 

geothermal electric capacity (about 15 MW) is located in Guadeloupe, one of its Caribbean 

departments. In continental France, the Paris Basin and the Aquitaine Basin are low-energy 

reservoirs that generally do not produce sufficient heat or flow-rates to drive electricitygenerating turbines. However, the country does exploit low-energy reservoirs for direct use and 

drilling for EGS is likely to increase in the near future. There is also a prominent EGS research 

and development facility in Soultz-sous-Forets that includes an operating power plant. Although 

the policies described below generally support exploration drilling for direct use or EGS, the 

mechanisms themselves could apply to hydrothermal drilling as well.
24 

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Table 6 summarizes the two programs that are reviewed in greater detail within this section.

Table 6. French Grant and Drilling Failure Insurance

Year Policy Name Notes

Grant

N/A Grants for 

Feasibility Studies

This grant program provides up to 50%, but no more than €300,000, of the cost to 

conduct feasibility studies for heat and power projects. The grant is administered by 

the French Environment and Energy Management Agency.

Drilling Failure Insurance

1982 Geothermal Risk 

Guarantee System

The exploration-phase component of this insurance program provides investors 

coverage for up to 90% of the cost to drill the first test well in return for a premium 

payment equivalent to 3.5% of the covered cost in the Île de France region and 5% in 

all other regions. The program insures the present value of the project once it is in 

operation. This component does not mitigate exploration risk.

The French Environment and Energy Management Agency (ADEME) administers a grant 

program to subsidize geothermal energy feasibility studies. This mechanism is somewhat unique 

in that it does not provide funds for exploration drilling. Instead, project developers—either 

public or private—can apply for a grant to cover 50% of the cost of a feasibility study for deep 

geothermal resources, not to exceed €300,000 (GEOFAR 2009a). The available literature does 

not specify exactly what constitutes a feasibility study according to ADEME; however, the 

resource identification phase that occurs before exploration drilling generally includes a 

literature review of existing information and data; geologic surveys leading to a geologic map of 

the area; geophysical and geochemical surveys; and in some cases, the commencement of

temperature-gradient hole drilling (GeothermEx 2010; GEA 2010a). 

A consortium of public and private entities also administers the Geothermal Risk Guarantee 

System, which was the first public insurance program in Europe to address risk in exploration 

drilling specifically for geothermal projects (GEOFAR 2009a). It has involved two programs: the 

first one was created in response to the first oil crisis and was in place from 1974 to 1982, and 

the second has been in place since 1982 (GEOFAR 2009b). These programs have facilitated 

development of France’s two major geothermal resources in the Paris Basin and the Aquitaine 

Basin, respectively. Although this program supports drilling for power generation projects, all of 

the wells drilled thus far on the French mainland have been for geothermal heat projects 

(GEOFAR 2009b). 

The current French scheme consists of two mechanisms that have different time horizons and 

support different stages of geothermal project development. The first mechanism is a short-term 

insurance program that provides coverage to investors for up to 90% of the cost of the first well 

if the well does not yield a productive resource. Just as with traditional insurance, this 

mechanism socializes the risks of geothermal drilling—that is, it allocates the costs of the 

program among various participants and bundles the proceeds to pay for failed drilling ventures 

(GEOFAR 2009a). In cases of partial success, the program compensates the participant as

necessary to render the project profitable. Compensation is based on an economic model that 

considers the temperature and flow-rate of the well and the technical, financial, and economic 

feasibility of the project. The one-time premium to participate in the program is 3.5% of the 
25 

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covered amount in the Île de France region (which includes the productive Paris Basin) and 5% 

in regions where the risk is higher (GEOFAR 2009b). 

The second mechanism is a 20-year insurance contract that guarantees the present value of the 

well if a resource has indeed been proven. This mechanism compensates a project sponsor in the 

case of an irreversible decline in the temperature or flow-rate of the well once the project is 

online and, as such, does not actually support the exploration phase. For this reason we do not 

provide a more comprehensive review of it. 

The Geothermal Risk Guarantee System is managed by SAF-Environment, a partnership of 

ADEME, Caisse des Dépôts et Consignations (a financial institution under control of the French 

Parliament), and other private financial entities (GEOFAR 2009b). The program fund is 

capitalized with payments from participants and project proceeds, investments, and public funds 

from ADEME (Bezelgues-Courtade et al. 2008). 

France currently has another risk guarantee for large groundwater heat pumps (AQUAPAC), but 

as this technology falls outside the scope of this report, it will not be discussed here. 

5.3 Germany: Loan Guarantee and Lending Support Mechanism

Low-energy geothermal resources are being exploited for direct use and combined heat and 

power applications in Germany, and developers have recently begun to look into deep, hot 

aquifers and EGS applications (Schellschmidt et al. 2010). The German government and KfW, 

the national development bank, support the development of geothermal heat and power through a 

number of policies and financial incentives. 

Table 7 summarizes the two programs that are reviewed in greater detail within this section.

Table 7. German Loan Guarantee and Lending Support Mechanism

Year Policy Name Notes

Loan Guarantee

2009 Risk of NonDiscovery of Deep 

Geothermal Energy

The loan program includes a loan forgiveness provision of up to 100% of the money 

borrowed by the developer in the case of failed exploration drilling. We have classified 

this provision as a loan guarantee.

Lending Support Mechanism

2009 Risk of NonDiscovery of Deep 

Geothermal Energy

The program offers loans up to €16 million or 80% of the eligible drilling costs for 

developers to undertake exploration drilling. Because KfW, the lender, is the national 

development bank of Germany, we consider this program a government-provided 

loan and have classified it as a lending support mechanism in addition to a loan 

guarantee.

Germany offers multiple financial support programs for renewable energy projects under the 

Market Incentive Programme (MAP) that is administered by the German Federal Ministry for the 

Environment, Nature Conservation, and Nuclear Safety (BMU) and the German development 

bank KfW (BMU 2012; Wendel et al. 2010). BMU and KfW offer two programs for geothermal 

power projects: the Risk of Non-Discovery of Deep Geothermal Energy program and the 

Renewable Energies Programme for Deep Geothermal Energy. For the purposes of this analysis, 

we do not assess the latter because it does not apply to the exploration phase. 
26 

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In 2009, Germany launched the Risk of Non-Discovery of Deep Geothermal Energy program 

(Fündigkeitsrisiko Tiefengeothermie) to minimize exploration risks associated with geothermal 

projects. The unique feature of this program is that it combines exploration risk mitigation with 

project financing (Kreuter and Schrage 2010). For the purposes of this report, we have 

categorized this program as a hybrid loan guarantee and a lending support mechanism because 

KfW, a government entity, is the lender and offers 100% loan forgiveness in the case of 

unsuccessful drilling. 

BMU and KfW provide this unique financing mechanism via a €60 million revolving loan fund. 

The maximum loan size for a given project is the lesser of €16 million or 80% of the eligible 

drilling costs (KfW), with the developer covering the remaining 20%. The loan period can be as 

long as 10 years. During the drilling period, KfW requires a risk surcharge to be paid in the form 

of a higher interest rate, usually in the range of 10% to 20%. Additionally, a €65,000 application 

fee is required along with an additional €45,000 for an approved loan to cover the program’s 

monitoring and auditing costs. 

There are two important features of the loan: a one- to two-year grace period during which the 

developer can defer repayment and a full release from loan liability mechanism. The full release 

from loan liability is enacted if the developer does not achieve a predetermined success threshold 

(e.g., if the thermal capacity of a drilled well is less than the required level to make the project 

viable) (Kreuter and Schrage 2010). If the exemption is enacted, the developer will not be 

required to repay the loan, and KfW will cover up to 80% of the drilling costs with the developer 

covering the remaining portion. 

An important feature of the Risk of Non-Discovery of Deep Geothermal Energy program is that 

developers are required to apply for the program through the local commercial bank with which 

they have a pre-existing relationship. For their part, the commercial bank processes the 

application and guarantees the loan to KfW in the event the developer goes bankrupt (though this 

guarantee does not cover drilling failure) (Kreuter and Schrage 2010). The developer’s bank also 

facilitates development of the loan application, which is then submitted to KfW (Kreuter and 

Schrage 2010). By requiring the bank to guarantee the loan, the program induces the bank to 

thoroughly assess the risks. Municipalities, municipally owned enterprises, and municipal 

special-purpose associations can file their loan applications directly to KfW. 

The unique feature of this program, as compared with U.S. loan guarantee programs, is that a 

government entity provides the financing that is guaranteed by a private lender. The U.S. loan 

guarantee programs, in comparison, represent guarantees provided by the government for debt 

supplied by private sources. Another unique feature of the German program is that KfW attempts 

to account for possible losses due to the high risk of geothermal exploration by charging a higher 

interest rate, called a risk premium, during the drilling phase. Under this feature, the additional 

interest charged protects public resources from excessive losses; however, the risk premium may 

prove to be too expensive to increase the level of project activity. Thus, the Risk of NonDiscovery of Deep Geothermal Energy program serves as an example of how one government 

created a customized approach to supporting its geothermal market by developing an innovative 

policy that incorporates elements of loans, loan guarantees, and insurance. 
27 

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Although no data is publically available regarding the number and amounts of loans made under 

KfW’s Risk of Non-Discovery of Deep Geothermal Energy Program, geothermal development in 

Germany is progressing. As of July 2012, four combined heat and power plants were operating 

with a total installed capacity of about 7.9 MWe, and another 30 projects were in development 

(BNEF 2012). 

5.4 Multilateral Banks and Development Agencies: Drilling Failure 

Insurance and Grant 

Superficially, the following three programs—Geofund, ARGeo, and the Geothermal Risk 

Mitigation Facility for East Africa—implemented by multilateral banks and development 

agencies may not appear to be relevant to the U.S. policy and market context. Geofund is now 

defunct, while ARGeo has faced serious delays.

16 All three were or are administered and funded 

through multilateral agencies or development banks. The United States, as a developed country, 

does not receive funding or other support from multilateral institutions for the development of 

domestic energy infrastructure, nor does it have a national development bank as do some other 

developed countries (e.g., Germany). However, the United States could still replicate these risk 

mitigation mechanisms summarized in Table 8. 

Table 8. Multilateral Banks and Development Agencies Drilling Failure Insurance and Grants 

Year Policy Name Notes

Drilling Failure Insurance

2006 GeoFund Established by the World Bank to support geothermal energy development in eastern 

Europe and central Asia, GeoFund’s main mechanism was drilling failure insurance. 

The World Bank discontinued the program after the pilot program in Hungary failed to 

confirm sufficient flow-rates and collected a USD $3.3 million claim.

2009 ARGeo The Global Environment Facility established ARGeo in partnership with other 

multilateral institutions in order to provide technical assistance and exploration risk 

mitigation to geothermal projects in the East African Rift region. Originally structured 

as a drilling failure insurance scheme, the risk mitigation mechanism was eliminated 

when the World Bank rescinded its funding.

Grant 

2012 Geothermal Risk 

Mitigation Facility

The German development bank KfW, in partnership with the European Union and 

African Union, offers grants for geothermal exploration and drilling. The program is 

targeted to projects in five nations located along the East African Rift. The fund pays 

additional success fees once the project secures outside funding for subsequent 

phases of development. 

5.4.1 Geofund

In 2006, the World Bank launched the GeoFund, a program to facilitate geothermal development 

in eastern Europe and central Asia (Shimizaki 2008).17 The fund was seeded with a $25 million 

grant from the Global Environmental Facility but was dropped in 2009 after spending its first 

tranche of about $4.5 million (World Bank). 

 

16 It is not clear in any of the available program literature why the Geofund and ARGeo programs were discontinued 

or delayed.

17 Targeted countries included Albania, Armenia, Azerbaijan, Belarus, Bosnia-Herzegovina, Bulgaria, Croatia, 

Georgia, Kazakhstan, Kyrgyzstan, Macedonia, Moldova, Montenegro, Romania, Russia, Serbia, Ukraine, Tajikistan, 

Turkey, Turkmenistan, and Uzbekistan. 
28 

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The GeoFund program was divided into three component instruments: technical assistance, 

direct investment funding for projects, and a drilling failure insurance mechanism. The only 

project that received coverage under the insurance mechanism was a pilot project in Hungary 

sponsored by the Hungarian Oil and Gas Company (MOL) and geothermal developers Enex 

(Iceland) and Vulkan Kft (Australia). The project did not proceed to construction primarily 

because sufficient flow-rates were not discovered in the two test wells. As a result, the drilling 

failure insurance mechanism was activated, and the World Bank paid MOL $3.3 million out of a 

coverage limit of $3.72 million (the limit was set at 85% of the eligible drilling cost) (Shimizaki 

2008; World Bank 2010). 

5.4.2 ARGeo

In partnership with the World Bank and United Nations Environment Programme, the Global 

Environment Facility established the East African Rift Geothermal Development Program 

(ARGeo) in late 2009 to provide technical assistance and exploration risk mitigation funding 

(Mwangi 2010). ARGeo is intended to support operations in six target countries to exploit 

resources along the seismically active East African Rift that are largely undeveloped.18 

The original ARGeo proposal took a dual approach: (1) regional networking facilitation and 

technical assistance and (2) a drilling risk mitigation fund that exclusively addressed explorationdrilling risk. In exchange for a premium paid by the developer, the risk mitigation fund provided 

up to 85% of eligible drilling expenses in the event that exploration drilling yielded an 

insufficient resource. This coverage ratio would be reduced for each successive well attempted. 

The World Bank rescinded its funding for the risk mitigation portion of the project in December 

2011, but at the time of writing, the networking and technical assistance portion of the project 

was still active. 

5.4.3 Geothermal Risk Mitigation Facility for Eastern Africa

After pulling out of the planning process for ARGeo, KfW created a geothermal risk mitigation 

facility in partnership with the European Union and the African Union in late 2011.19 This 

program offsets the risk of non-performing exploration wells by providing grants for 80% of the 

cost of surface studies, 40% of the cost of exploration drilling, and 20% of the cost of required 

infrastructure improvements (GRMF 2012). Grants are available to both government and private 

developers. To further incentivize developers, the bank offers an additional financing success fee 

for projects that secure outside financing for subsequent phases of development (KfW 2011; 

Muir 2011). Although it offers additional incentives and funding for other activities in addition 

to exploration drilling, this facility essentially functions in much the same way as the U.S. 

Industry-Coupled Case Studies program: it is a cost-share program with a data collection 

requirement. 

At the time of publishing, the Geothermal Risk Mitigation Facility had just closed the first round 

of applications. KfW and the African Union have stated their intentions to expand the facility 

after it is piloted. 

 

18 Projects in Ethiopia, Eritrea, Kenya, Rwanda, Tanzania, and Uganda are eligible.

19 Projects in Ethiopia, Kenya, Rwanda, Tanzania, and Uganda are eligible.
29 

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5.5 Australia: Grant

Conventional hydrothermal resources are nearly non-existent in Australia. However, the country 

has significant potential for developing deep hot aquifers and EGS resources, and the 

mechanisms Australia is using to support the development of these resources could also be 

applied to conventional hydrothermal exploration. 

Table 9 summarizes the program that is reviewed in greater detail within this section. 

Table 9. Australian Grant

Year Policy Name Notes

Grant

2008 Geothermal Drilling 

Program 

Australia implemented a cost-share grant program to support exploration drilling for 

EGS and deep, hot aquifers. The program provided a matching grant of up to AUD $7 

million for drilling activities. 

In 2008, Australia introduced the Geothermal Drilling Program to provide $50 million Australian 

dollars (AUD) for exploration drilling. The government sought to offset a portion of the 

exploration drilling expenses for a limited number of projects by offering matching grants of up 

to AUD $7 million. The Australian Department of Resources, Energy, and Tourism issued seven 

grants through a competitive, merit-based selection process (Australia DRET 2009). 

Of the seven grants awarded, four were forfeited. In a report commissioned by the Australian 

Centre for Renewable Energy, the Allen Consulting Group (2011) noted that the developers 

found it difficult to raise the required matching funds by the set deadline (due in part to 

unfortunate coincidence with the global financial crisis); this may have been a primary factor for 

the forfeitures. The final round of applications closed in August 2009, and all funded projects 

must be completed by December 31, 2014. 

5.6 Iceland: Grant and Government-Led Exploration

Geothermal plants provide a significant portion of Iceland’s electricity needs and represent 

nearly one-quarter of installed capacity and generation. Due to the country’s location on the midAtlantic ridge, the country has advantageous conventional hydrothermal resources. Another 

unique aspect of geothermal development in Iceland has been its decentralized and yet public 

nature. Iceland’s government exploration activities date to 1969 when a municipal government 

constructed the first geothermal power plant in the country. Since then, resource exploration, 

exploration drilling, development, and electricity production have remained mostly the 

responsibility of municipal, regional, or national government entities, under the regulation of the 

National Energy Authority (GeothermEx 2010).20 

Table 10 summarizes the two programs that are reviewed in greater detail within this section.

 

20 HS Orka is the only private firm that operates geothermal power plants in Iceland (Íslandbanki 2010).
30 

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Table 10. Icelandic Grant and Government-Led Exploration

Year Policy Name Notes

Grant

2008 National Energy 

Fund Grant

The National Energy Fund offers a cost-share grant to support exploration activities 

up to 50% of project costs. The grant is paid out in three equal payments. 

Government-Led Exploration

1969 Government-led 

Exploration

Geothermal energy development has been led by government entities at both the 

national and municipal levels. Currently, most exploration still takes place as the 

result of municipal government and/or utility geothermal development. There is only 

one private sector entity that operates power plants.

Iceland launched the National Energy Fund in 1967 to provide loans and grants to support 

geothermal exploration drilling (heat and electricity applications). In 2003, Iceland passed an act 

that placed administration of the program with the National Energy Authority (Björnsson 2010). 

The fund includes a few programs for various types of geothermal projects, but hydrothermal 

exploration is eligible for the fund’s grant program only (Government of Iceland 2009). Public 

and private organizations are eligible for the grant that can cover up to 50% of project costs, 

making it a cost-share program (GEOFAR 2009c). The grant is paid out in three equal payments: 

(1) when work begins, (2) when work is halfway done, and (3) when work is complete 

(GEOFAR 2009c).

5.7 Japan: Grant and Government-Led Exploration

Japan was an early adopter of geothermal energy for power generation. The first commercial 

plant was commissioned in 1966 (Akeno and Sugino 2010). At over 23 GW, Japan has one of 

the highest potential hydrothermal resource bases in the world. The power market is restructured

and dominated by 10 regional electric utility companies. Geothermal capacity additions have 

been stagnant since the mid-1990s, but recently adopted renewable energy policies and 

incentives may be positioning the geothermal industry for a revival.

Table 11 summarizes the two programs that are reviewed in greater detail within this section.

Table 11. Japanese Grant and Government-Led Exploration

Year Policy Name Notes

Grant

2008 Cost-Share Grant The cost-share grant covers 50% of the cost to drill exploratory wells and 20% for 

development and injection wells. In recent years it has not been well funded. 

Government-Led Exploration

1974 Geothermal 

Research Program

The Agency of Industrial Science and Technology (AIST) created a geothermal 

research program in 1974 in response to the first oil crisis. The program included

exploration drilling and was transferred to the New Energy Development Organization 

in 1980. 

In 1974, the Japanese Agency of Industrial Science and Technology (AIST) undertook a large 

geothermal research program that included exploration drilling (GeothermEx 2010). In 1980, the 

government transferred responsibility for the program to the New Energy Development 
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Organization (NEDO). Together, the two agencies funded the research initiative for the purpose 

of reducing exploration risk and subsequently contracted private firms to undertake the drilling

(GeothermEx 2010). As the research initiative identified and demonstrated resource 

effectiveness, NEDO and AIST transferred their use to private firms to develop them into power 

plants (GeothermEx, 2010).21

In conjunction with its research program, the Japanese government introduced a cost-sharing 

program to subsidize exploration drilling. Although not well funded in recent years, the program 

covers 50% of the cost to drill exploratory wells, with 100% repayment required if the wells are 

successful (Akeno and Sugino 2010). In 1986, the government expanded the program to also 

cover 20% of the cost of development and injection wells (Akeno and Sugino 2010). 

The reduction in risk created by NEDO’s cost-share subsidy and research effort may have 

contributed to geothermal power development in Japan. Installed capacity increased from 

139 MW in 1976 to 539 MW in 2011 (BNEF 2012; GeothermEx 2010). Although the cost-share 

program still existed as of 2010, Japan’s geothermal power sector stagnated between 1999 and 

2010, adding just 2 MW in 2004 (Akeno and Sugino 2010). 

5.8 New Zealand: Government-Led Exploration

New Zealand was an early adopter of geothermal energy. Commissioned in 1958, the Wairakei

geothermal power plant was one of the first in the world. New Zealand currently gets a 

significant portion of its power from geothermal plants, which generated 13.7% of the country’s 

electricity in 2012 (Ministry of Economic Development 2013). This is due in part to the market 

competitiveness of geothermal power and other renewables in New Zealand, and also to the 

abundance of hydrothermal resources on the North Island (Harvey et al. 2010). 

Table 12 summarizes the program that is reviewed in greater detail within this section.

Table 12. New Zealand Government-Led Exploration

Year Policy Name Notes

Government-Led Exploration

1958 Government-led

Exploration

Most of New Zealand’s geothermal development occurred when the country’s utility 

companies were government-owned. As such, these government utility companies, 

and in turn the government itself, carried the risk associated with exploration drilling. 

Most of New Zealand’s geothermal power development was due to government-led exploration 

(GeothermEx 2010). Although two of the five electricity producers in New Zealand are now 

private sector companies, much of the country’s geothermal development took place when the 

government bore the exploration risk, and some of the government-run utilities still undertake 

geothermal exploration projects today (GeothermEx 2010). 

 

21 In some cases, NEDO and AIST transferred proven resources to the contracted industry partner in order for them 

to develop the resources for power generation; in such cases, the cost-share for exploration drilling applied 

(GeothermEx 2010). We think they may have tendered some of these proven resources as well.
32 

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5.9 Indonesia: Lending Support Mechanism and Government-Led 

Exploration

Indonesia has the highest potential for geothermal power in the world, but with only 1,002 MW 

of installed capacity, much of the potential remains untapped (BNEF 2012). PT PLN, the stateowned utility, has a monopoly on electricity distribution and pricing. Traditionally, state-owned 

enterprises and municipal entities conducted geothermal development activities, but publicprivate partnerships and private developers have started to enter the industry. 

Table 13 summarizes the two programs that are reviewed in greater detail within this section.

Table 13. Indonesian Lending Support Mechanism and Government-Led Exploration

Year Policy Name Notes

Lending Support Mechanism

2011 Geothermal Fund 

Facility

This government loan program provides private sector developers, state-owned 

enterprises, and municipal government developers with loans for exploration and 

confirmation from a revolving loan fund. Municipal government entities can access the 

funding without repayment in the case of failed exploration drilling, while private

sector and state-owned enterprise developers must repay the loan with interest, no 

matter the outcome of exploration drilling.

Government-Led Exploration

1974 Geothermal 

Research Program

Until recently most geothermal development had been conducted by government 

entities, such as state-owned enterprises and/or government-owned utilities. More 

recently, private sector developers and public-private partnerships have begun to 

enter the market; however, most existing geothermal plants were the result of 

government-led efforts. 

In 2011, Indonesia created the Geothermal Fund Facility (GFF), a revolving loan fund with an 

initial capitalization of 1.237 trillion Indonesian rupiah ($145 million USD) designed to help 

mitigate exploration-drilling risk.

22 The GFF is structured as a public-private collaboration in 

which local governments or firms (private and state-owned) in possession of either a geothermal 

mining permit or a geothermal power concession undertake exploration activities (Hasan and 

Wahjosoedibjo 2012; PIP). The GFF issues loans to these three types of entities to undertake 

exploration activities. 

When a local government receives funding from the GFF, they contract a private firm to 

undertake the exploration activities, including drilling (Wahjosoedibjo 2012). Once a potential 

resource proves viable for power generation, the local government can issue a tender for 

development of the proven resource. Then, the winning bidder must pay for the exploration data 

in order to receive its mining license. Proceeds from the data and information package purchased 

by the winning bidder will partially recapitalize the fund (Hasan and Wahjosoedibjo 2012; PIP). 

After the winning bidder develops a field and builds a power plant, the bidder sells its power to 

the government-owned utility through a power purchase agreement. The Indonesia Investment 

 

22 According to an interview conducted for this report, the GFF may no longer be completely “revolving” due to the 

high risk of geothermal exploration (Wahjosoedibjo 2012). That is, because losses are potentially high, fund 

designers thought the fund might be drawn down faster than it could be recapitalized. 
33 

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Agency will likely forgive loans to local governments for any unsuccessful exploration activities 

(Wahjosoedibjo 2012).

With private or state-owned firms that are holders of geothermal mining permits and geothermal 

power concessions, GFF funding takes the form of a loan disbursed in stages that is repayable 

with interest when the entity completes successful or unsuccessful exploration activities (PIP). 

Because the loan is repayable whether or not the resource proves viable, the entity conducting 

exploration activities bears all risk of unsuccessful drilling. Private developers and state-owned 

enterprises that successfully develop steam fields into operating power plants sell their power to 

the state-owned utility through power purchase agreements. 

Because both government entities (such as municipal governments and state-owned enterprises) 

and private developers develop geothermal resources in Indonesia, the country’s policy regime 

can be categorized as a hybrid lending support mechanism and government-led exploration. The 

GFF is a government-provided lending program available to private developers, government 

entities, and public-private partnerships. The state-owned developers and municipal governments 

that develop geothermal resources give the hybrid regime its government-led character. In the 

case of local government exploration, the GFF takes on the risk of failed exploration drilling. On 

the other hand, private and state-owned developers assume all the exploration risk under the 

GFF. However, this type of government exploration scheme is different from government 

agencies undertaking exploration drilling and power plant construction directly because the 

government-owned utility neither develops nor operates the steam field or power plant. 
34 

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6 Characteristics of Exploration Policies and 

Applicability to the United States

This section examines which overall policies and/or specific policy components spurred

geothermal deployment, along with providing possible explanations as to why they were 

successful. Each discussion includes an assessment of the appropriateness of a given program to 

the U.S. policy context. Due to a lack of detailed information beyond what is available publically 

and the subsequent challenge of linking impacts to a particular policy, this analysis is 

predominantly qualitative. As in Section 4, the following discussion is organized by potential 

leverage of private investment (highest to lowest). 

6.1 Loan Guarantee 

Loan guarantee programs are generally public-private partnerships and involve multiple 

contracts between several parties. Thus, these programs tend to have complex structures, and 

their effectiveness can be impacted by many different elements of the policy’s design. 

It is important for the guarantor to accurately assess the ability of geothermal exploration 

projects to access loans on the private market. The guarantor must also determine whether 

providing a loan guarantee will bring down the cost of financing by an amount that will help 

projects move forward. In addition, these programs have the potential for high losses in the case 

of loan defaults, although due diligence in assessing project and borrower risks could help 

mitigate this possibility. 

The U.S. 1974 Loan Guaranty and Section 1705 programs described in Section 5.1 would seem 

to be an obvious fit to be reapplied in the United States. However, for a couple reasons, these 

programs may not be good candidates for implementation today. First, there may be less political 

appetite for another loan guarantee program following the high profile bankruptcies and defaults 

of a few borrowers under the 1705 program. Second, due to fiscal concerns, it may be difficult to 

gain enthusiasm for a program in which the ultimate cost is unknown. But the creation of a loan 

loss reserve could make a loan guarantee more appealing. Once the loan loss reserve is 

expended, any subsequent defaults would be made whole through private channels (i.e., there 

would be no government backing after a certain amount of defaults). 

With regard to a loan forgiveness-type guarantee, such as Germany’s Risk of Non-Discovery of 

Deep Geothermal Energy program, this type of guarantee is less likely to apply to the United 

States than the traditional loan guarantees previously offered by the U.S. federal government. 

The United States has no national development bank akin to KfW to administer such an 

initiative, and the federal government usually prefers to take a more market-oriented approach by

incenting private lenders with government loan guarantees rather than providing loans. 

Furthermore, the KfW program has found it challenging to engage developers’ commercial 

banks because many lack experience assessing the risk of geothermal projects, thereby creating 

high per-loan transaction costs (Kreuter and Schrage 2010). Programs looking to replicate this 

model may want to consider how best to engage private-sector lenders in geothermal financing, 

especially where there has been little experience to date. For example, banks could be provided 

with training on geothermal technologies and project risks. 
35 

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However, DOE or another government agency, such as the Federal Financing Bank, could be 

authorized to provide loans directly with a forgiveness mechanism in much the same way that 

the Department of Education provides loans for higher education. In fact, the Federal Financing 

Bank has provided a direct loan to a geothermal project–guaranteed by the Section 1705 

Program—in the past. The Neal Hot Spring project recently put into commercial operation by 

U.S. Geothermal received a non-forgivable loan of nearly $100 million from the Federal 

Financing Bank (Lowder 2012). Despite this success, most U.S. government agencies do not 

have the capacity to manage loans directly as KfW does in Germany. 

Interestingly, low-cost public-private financing programs have been implemented at the state 

level, and there were several attempts in Congress and the Senate to establish a governmentbacked finance institution for clean energy projects in 2009.23,24 The bills that were introduced 

died in committee. Generally, using the model of direct loans would convey more risk and less 

leverage of private investment to public resources as compared to providing loan guarantees. 

Another attractive feature of the Risk of Non-Discovery of Deep Geothermal Energy program is 

that it seeks to support alternative geothermal power technologies, such as enhanced geothermal 

systems, and it does not require a typically requisite probability of success (POS) study (Kreuter 

and Schrage 2010). By implementing a similar program in the United States, there is the 

potential to encourage projects that use technologies or applications beyond those that are 

currently being commercially developed, such as EGS. 

6.2 Drilling Failure Insurance

As demonstrated in the case of the Geofund (Section 5.4), public insurance programs have high 

leverage potential on a programmatic basis (although claims paid to a given project in the event 

of an unsuccessful exploration can be high). Provided that these programs can judiciously select 

clients and diversify risk exposures, drilling failure insurance programs can be a cost-effective 

and self-sustaining option. 

The French example shows how a risk insurance scheme could enable development at scale 

while containing losses. However, this is due in part to the high success rate of drilling for 

geothermal heat projects. The available data on the wells drilled in the Paris Basin since 1987 

(when France reinstituted its insurance scheme) show a success rate of 74% (with partial failures 

at 17% and total failures at 9%), which is substantially higher than the rate encountered by 

geothermal power developers in the United States (Bezelgues-Courtade et al. 2008). In the 

 

23 Most notably, Senator Jeffry Bingaman and Congressman Christopher Van Hollen introduced separate bills in 

2009 that would have established a clean energy financing pool. Included in the American Clean Energy Leadership 

Act of 2009 (S.1462), Senator Bingaman proposed the Clean Energy Deployment Administration within the 

Department of Energy to provide financing for clean energy projects. Congressman Van Hollen introduced H.R. 

1698 to establish a federally owned, independent “Green Bank” funded by U.S. Treasury bonds. 24 In 2011 the State of Connecticut established the Clean Energy Finance and Investment Authority with the purpose 

of leveraging private investment in renewable energy and energy efficiency projects. See www.ctcleanenergy.com

for more information. California has two “green bank” institutions as well; see: 

http://www.treasurer.ca.gov/greenbank/index.asp. If these types of quasi-government “green banks” are established 

in states with geothermal resources such as California, they could conceivably provide low-cost financing for 

geothermal projects.
36 

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United States, developers can expect a success rate somewhere in the neighborhood of 35% to 

50% for well-researched and vetted drilling sites (Speer 2012). If the United States were to 

implement a similar program, it could potentially offset the lower success rates by charging a 

higher insurance premium.

Effective risk management entails the optimal balance of returns to risks. For drilling insurance 

schemes to be self-sustaining, the revenue stream from premium payments must be higher than 

paid claims. However, premium rates should not be so high as to discourage developer 

participation.

In addition to the applicability considerations gleaned from the case studies in Section 5, 

policymakers may want to consider how to provide clarity in the claims-making and payout 

processes. Clear information about the required capital requirements, policy holder eligibility, 

the division of payouts between the developer and investors, eligible claims, and the coverage 

triggers (i.e., at what temperature and flow-rate is the well considered a loss) can help lower the 

participants’ perceptions of policy risk. Specifying how many test wells are eligible for cost 

recovery and whether there is a declining rate of coverage for each well can also help prevent 

developers and program administrators from making erroneous assumptions about 

covered losses. 

Government insurance programs currently exist in the United States primarily to allow riskprone populations without access to the private insurance market the opportunity to protect 

themselves against certain exposures. Such gaps in private coverage usually exist because either 

the cost of insurance is out of their reach for those that need it most or insurance for particular 

risks is not available. The earthquake insurance offered by California is one example. 

Catastrophes, such as earthquakes and floods, pose potentially devastating and concentrated loss 

probabilities, and private insurers may risk insolvency if their coverage in these areas is triggered 

at large scale. Therefore, the federal and state governments have stepped in to meet a need (i.e., 

the protection of its population) that is in their interest.

If geothermal energy deployment is deemed to be in the national interest (e.g., for the various 

environmental and energy security benefits it provides), it may be reasonable for policymakers to 

devise a scheme that mitigates or removes one of its principal barriers: the exploration drilling risk.

An insurance program would likely require some high up-front costs. It would need to staff an 

underwriting team as well as an administrative body, and the cost of conducting due diligence on 

the initial projects would not be defrayed by the proceeds from an existing portfolio. Such a 

program could sustain itself over time but would likely require several years to do so, depending 

on the rate of project participation. 

6.3 Lending Support Mechanisms

Lending support mechanisms for the exploration phase of geothermal development may be an 

attractive policy alternative due to the fact that nearly all exploration-phase financing in the 

United States comes from equity investors. Not only is equity generally more costly than debt, 

but the lack of lenders willing to make loans for exploration drilling and reservoir confirmation 

significantly limits developers’ potential sources of capital at this phase. Lending support 

mechanisms might spur more lenders to fund geothermal projects during the exploration phase, 

rather than solely at the production/injection well drilling and power plant construction phases. 
37 

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In the U.S. context, a lending support mechanism in the form of an interest rate subsidy could 

attract private lenders by providing interest payments sufficient to cover the risk of exploration 

drilling, while at the same time providing developers with a lower cost of capital. In contrast, 

government-provided loans could crowd out private investment. With direct government loans, 

private capital might instead flow to subsequent phases of development. To have a significant 

impact on project development, such a program would require substantial public funding with 

the possibility for losses. This puts into question the applicability of a government-provided loan 

program in the United States, at least at the federal level. This is especially true when

considering recent concerns surrounding defaults under the DOE loan guarantee program and 

general concerns about fiscal prudence. 

The structure of Indonesia’s GFF provides an innovative example of a government direct loan 

program. Should U.S. policy seek to offset exploration-drilling risk faced by project developers 

through some sort of government loan program, a revolving loan fund may provide the most 

value to taxpayers when compared to other types of government loan programs, grants, and 

cooperative agreements. Because it is likely that 90% of U.S. geothermal resources lie on federal 

land (DOI 2008), the government could tender proven resources for leasing, as Indonesia does. 

The initial public investment in exploration drilling could then be repaid by the winning bidder 

from the capital they raise from private investors for subsequent phases of development. In the 

United States, such a fund could be managed as a national geothermal trust fund, which is a 

familiar concept for several other federally funded programs. 

6.4 Grants and Cooperative Agreements

Grant programs directed specifically at exploration drilling reduce the amount of equity and/or 

debt a developer must raise from outside sources prior to the exploration phase. 

The U.S. Industry-Coupled Case Studies Program, Iceland’s National Energy Fund grant 

program, and the Japanese cost-share program all may have helped contribute to the early 

development of the geothermal power sector within those countries. As previously mentioned, 

the Industry-Coupled program in the United States resulted in the exploration of 14 sites and the 

construction of eight power plants, seven of which remained in operation in 2010 (Moore et al. 

2010). Likewise, the Japanese cost-share program contributed to a significant increase in 

installed capacity in the late 1970s and early to mid-1990s. Iceland’s grant program, in concert

with municipal and regional government-led efforts, was a key driver of the growth of the 

geothermal power sector. Today, at least 22% of Iceland’s total installed generation capacity is 

geothermal (Ragnarsson 2010). These three examples demonstrate the potential usefulness of 

grants and cooperative agreements adapted specifically for the exploration phase of geothermal 

development. 

A grant or cost-share covering a portion of the exploration drilling and resource confirmation 

costs helps developers to mobilize outside finance before having proven the resource. 

Furthermore, programs, such as Japan’s cost-share program, may increase the sustainability of 

public funding by requiring repayment of funds from successful projects or requiring winning 

bidders to repay the exploration costs on proven resources. 

The country programs described in Section 5 highlight the fact that the impact of such programs 

on individual projects can depend on per-project funding levels, the structure of payments, and 
38 

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government capacity for funding them. An overly ambitious deadline for securing funds to match 

the AUD 7 million grant in the case of Australia’s Geothermal Drilling Program may have 

impeded developers’ ability to use the grant (Allen Consulting Group 2011). As a result, 

developers had to forfeit more than half of the grants awarded. On the other hand, the U.S.

Industry-Coupled program generously covered up to 50% of exploration drilling costs

(Bloomquist 2003). 

Additionally, grants covering exploration activities other than drilling, such as France’s 

feasibility study grant, may do little to address the significant exploration risk associated with 

drilling. But these studies may decrease the proportion of failed exploration wells as they can

refine potential resource areas and nominally reduce the cost of developing projects. 

Those interested in creating a new capital grant program in the United States that specifically 

targets exploration drilling expenses may take note of Japan’s cost-share program as an 

alternative to unrecoverable grants. As previously mentioned, Japan attempts to recover all or a 

portion of the government capital from successful projects in the form of a loan, while waiving 

repayment for unsuccessful wells. This creates a more sustainable model and higher leverage of 

private investment. In cases where drilling is successful, repayment of the funding with interest 

lessens the downside for potentially drilling dry holes. This type of “grant” could also mobilize 

additional private investment in geothermal power projects by limiting their exposure to only a 

portion of the exploration risk, in the case of a cost-share. Indeed, a study of risk mitigation 

strategies funded by the Geothermal Technologies Program in 2008 recommended a government 

co-funded drilling mechanism to provide capital for exploration drilling (Deloitte Development 

LLC 2008). 

One potential downside is that grants are unrecoverable expenditures, and thus, unless they are

“repayable” grants, the government will not recoup the funds once spent. Although the Japanese 

Text Box 1. Drilling Tax Incentives

Geothermal power projects cannot currently take advantage of renewable energy tax 

incentives (e.g., the PTC and ITC) until a project is operational. Because of the long lag 

time between project initiation and commissioning, this creates a timing mismatch between 

the time when the project encounters high exploration risk and when an investor can make 

use of tax incentives. This mismatch hinders the ability of current U.S. renewable energy 

tax incentives from addressing the high risk of exploration drilling.

While not grants, tax incentives can create additional value by reducing a developer’s tax 

liability. U.S. oil and gas investors enjoy a number of tax incentives applicable to the 

exploration and development phase of oil and gas projects. Among those is the option to 

expense or capitalize intangible drilling costs (IDCs), such as drilling time, labor, and 

drilling fluids. Investors in oil and gas projects can deduct up to 100% of a project’s IDCs 

in the first year regardless of whether or not a well produces oil (Sherlock 2011). With the 

passage of the Energy Tax Act of 1978, Congress permitted geothermal developers to 

enjoy the same tax treatment. However, the business practices of applying this deduction, 

as well as the percentage depletion deduction, are uncertain and may warrant further 

research.
39 

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loan/grant mechanism attempts to recoup a portion of the public investment, the high failure rate 

of exploration drilling does not permit any grant structure to recoup capital from every funded 

project.

6.5 Government-Led Exploration

Government-led exploration programs can spur project development but require significant 

funding and have high administration costs. Also, government-led exploration may not provide 

much leverage in the exploration phase, as compared to other policy options. However, these 

types of programs may provide leverage in terms of private sector investments in later phases 

of development. 

The research and demonstration initiatives undertaken by NEDO and AIST in Japan contributed 

to the early growth of the Japanese geothermal power sector. The efforts of both agencies also

highlight the utility of transferring resources proven through government exploration drilling—

either through a public tender, land lease, or another mechanism—to the private sector. 

Likewise, Iceland’s government-led development, in conjunction with the previously described 

grant, has resulted in substantial industry growth and project development. The unique 

characteristic of Iceland’s government-led development is that municipal and regional 

governments and publically owned utilities, rather than national government entities, have 

undertaken nearly all of the development activities. Similar efforts could be a feasible for U.S. 

municipal utilities and cooperatives located in areas with good, undeveloped hydrothermal 

resources (or perhaps where EGS is feasible, once technology costs have come down). However, 

given the geographic location of most hydrothermal resources in the United States, this option is 

very limited in its overall potential to rapidly develop the country’s resources. And with a limited 

rate base and requirements to make conservative investments, these typically smaller, local 

utilities may not find geothermal exploration economically viable.25 

Another complicating factor for government-led development is that governments face the same 

risks in identifying and exploring geothermal resources as the private sector. Any expenditures 

that result in dry wells are sunk costs at the expense of the taxpayer. Altogether, most policy 

supports for the energy sector in the United States, renewable or otherwise, consist of tax 

incentives and/or subsidies. Unveiling a government geothermal exploration initiative would be 

inconsistent with recent renewable energy incentives and may not be feasible, especially in light 

of the fact that the U.S. geothermal market is viewed as more mature than it was in the 1970s and 

1980s when the first exploration programs were implemented. 

We did not include an analysis of the characteristics or applicability of Kenya’s state-owned 

Geothermal Development Corporation or the Philippines National Oil Company Energy 

Development Corporation because we do not see such state-owned geothermal development 

entities as a viable alternative in the U.S. market. For a brief discussion of the Geothermal 

Development Company and Philippines state-owned energy company, see Appendices A and B.

 

25 Some municipal utilities, such as the Los Angeles Department of Water and Power, which serves nearly 4 million 

customers, are quite large. For more information, see: https://www.ladwp.com/ladwp/faces/ladwp/aboutus/awater/a-w-factandfigures?_adf.ctrl-state=1653rwexct_21&_afrLoop=147738510606000. 
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7 Key Findings and Additional Enabling Opportunities

The United States has significant, untapped hydrothermal resources. One of the main hurdles to 

utilizing this baseload electricity resource is the high risk of exploration drilling. Because of this 

risk, developers find raising capital for this phase of development particularly challenging. Even 

when developers are able to locate willing investors, the cost of capital can be prohibitive and is 

almost exclusively equity capital, which is by its very nature more expensive than debt. To 

address this barrier in attracting investment to the exploration phase, several countries including 

the United States have implemented policies intended to reduce the cost of capital or mitigate the 

investment risks. Our analysis has attempted to identify the policies used and comment on their 

characteristics and potential applicability to the United States. 

The five stylized policy types initially presented in Section 4 include loan guarantees, drilling 

failure insurance, lending support mechanisms, grants and cooperative agreements, and 

government-led exploration. These policies have been implemented in a number of countries. At 

various times since the 1970s, the United States has implemented loan guarantees, a lending 

support mechanism, and grant programs in relatively straightforward manners. On the other 

hand, applications of all five policy types have been more nuanced when applied in other 

countries. In some cases, the policies were implemented in a hybridized manner, combining 

features of more than one policy. In Japan, for example, the government has provided loans for 

geothermal exploration that convert to grants if a viable resource cannot be obtained. The 

government-owned German development bank KfW offers a loan program for geothermal 

exploration in Germany that is notable for its loan-forgiveness feature that functions essentially 

like a loan guarantee. 

Also, countries such as Iceland and the United States have provided multiple policies 

concurrently. In Iceland, government- or municipally owned companies undertake most of the 

geothermal exploration projects while the national government provides grants to support the 

projects. In the United States, the Industry-Coupled Case Studies program operated concurrently 

with the 1974 Loan Guaranty program and other incentives. 

One noticeable difference between the U.S. policies and those of other countries is that the 

United States has not provided financing or lending support mechanisms designed specifically 

for the exploration phase. Although the Loans for Geothermal Reservoir Confirmation program 

was intended to fill this role, it was never funded. Japan, Germany, Indonesia, multilateral banks 

and development agencies, on the other hand, have provided loans and/or loan guarantees 

specifically targeted to the exploration phase. Thus far, U.S. loan guarantees have helped 

facilitate loans for subsequent phases of development or for the entire project cycle. This may be 

an area for further consideration, especially given the fact that current U.S. policies support 

equity investments for operational projects. 

There may be room, even when considering the current U.S. policy context, for innovative 

policies and incentives targeted specifically to the exploration phase. The following options are 

theoretical and would deserve further scrutiny and research to understand their potential efficacy: 

• Encourage exploration-phase financing

o Exploration-phase loan guarantees—Current and past loan guarantees offered by 

the federal government covered loans for the entire project cycle. Targeting 
41 

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geothermal loan guarantees to the exploration phase may encourage lenders to 

begin loaning money for exploration (likely on a portfolio basis), a phase 

currently funded almost exclusively by high cost equity. 

o Direct loan program—Although the 1980 Loans for Geothermal Reservoir 

Confirmation Program was never funded, authorizing and funding a new loan 

program specifically targeted to conventional geothermal exploration, or 

renewable energy projects in general, may help address the lack of debt financing 

currently observed in the U.S. market. Loans could either be repayable no matter 

the outcome of exploration drilling, or partially or fully forgivable in the case of 

unsuccessful drilling.. The Federal Financing Bank has already provided one loan 

to a geothermal project. Creating a more targeted and/or dedicated loan program, 

such as the Green Bank proposed in 2009, could fill in the gap left by private 

lenders during the exploration phase. 

o Offer a cost-share grant program for resource identification and exploration 

activities along the lines of the Industry-Couple Case Studies program. 

• Exploration-phase tax incentives

o Tax deduction or credit applicable to all or a subset of exploration costs—The 

incentives could be offered until projects reach a specific point in the 

development cycle. Considering the GEA’s four-phase development cycle, all 

drilling costs up to and including the drilling of one full-sized discovery well 

could be considered. To avoid abuse, the incentive could be paid out in 

installments corresponding to defined milestones during the project development 

cycle. The incentives could take the form of a refundable tax credit or cash grant 

akin to the 1603 Treasury program. 

• Expand the resource base by leveraging oil and gas drilling through co-production 

o Incentives for the assessment and/or development of geothermal resources 

produced as a result of oil and gas drilling—These incentives could include those 

mentioned above regarding exploration-phase tax incentives, or some other coproduction-specific incentive to develop or collect data about co-produced 

geothermal fluids.

An area for future research could be to quantify the outcomes of the policy applications 

presented in Section 5 in order to systematically identify and analyze how many projects these 

policies supported in their respective countries. Such research could also determine how much 

public funding was required to support projects, as measured against a country’s existing 

resource and market barriers. Except for the U.S. experience, the current analysis did not collect 

data at this level of detail from each country. Such research could attempt to determine, either 

through quantitative methods or case-study comparisons, whether policies that provide the most 

leverage of private investment facilitate the most rapid project development and in which 

contexts this may be the case. The ultimate purpose of such research would be to identify which 

policies maximize the goals of deployment and leverage of private investment, either 

concurrently or exclusively. The current state of slow growth in geothermal development 

demonstrates that when left to market forces alone, geothermal development will proceed slowly 

and sporadically. 
42 

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This report is available at no cost from the National Renewable Energy Laboratory (NREL) at www.nrel.gov/publications.

Appendix A. Philippines: Government-Led Exploration

The Philippines has the second-highest installed geothermal power capacity in the world with 

1,998.8 MW, and its 2009–2030 National Energy Plan lays out a strategy for surpassing the 

United States as the world leader (BNEF 2012; Philippine DOE 2009). The GEA identified the 

country as having 3,500–5,730 MW of potential. It set a target of 3,447 MW in its 2009–2030 

Energy Plan—a 75% increase over the country’s 2009 capacity—though it has only installed 

approximately 27 MW since establishing its most recent target.

The renewable energy sector in the Philippines—the geothermal sector in particular—has 

recently undergone significant changes. Prior to 2007, government entities had conducted nearly 

all geothermal development activities in the country, except for the first two steam fields,

developed by Chevron’s Filipino precursor. In the mid-1970s the government created the 

Philippine National Oil Company-Energy Development Corporation (PNOC-EDC), which 

undertook all geothermal development projects until it was privatized in 2007 (Catigig 2008). It 

is now called the Energy Development Corporation. The World Bank and the Japan Bank for 

International Cooperation financed the majority of PNOC-EDC’s geothermal development 

activities, providing loans for projects accounting for 1,043 MW of PNOC-EDC’s 1,149 MW of 

installed capacity (Dolor 2005). Due to the fact that the PNOC-EDC was a government-owned 

company, the national government of the Philippines took all the risk associated with exploration 

activities. 

The privatization of the PNOC-EDC, along with the market-based approach to renewable energy 

development laid out in the 2008 renewable energy law, will provide an interesting case study of 

the effectiveness of government-led geothermal development as compared to a market-based 

approach. However, a full analysis of the transition to a privatized geothermal sector with 

market-based incentives may not be possible until actual capacity additions coming online since 

2007 can be compared to the plan’s 2015 target of 2,382 MW. 

Over the last decade, the government has opened up the geothermal power sector to competitive 

market forces. This has included privatization of the state-owned National Power Corporation’s 

geothermal assets in 2001; the introduction of a bidding process for exploration projects in 2008; 

and the legal definition of geothermal resources as mineral resources, which has allowed entry of 

foreign development companies into the Filipino market. In 2011, the Philippine government 

approved contracts for the construction and power purchase of six new geothermal facilities.
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This report is available at no cost from the National Renewable Energy Laboratory (NREL) at www.nrel.gov/publications.

Appendix B. Kenya: Government-Led Exploration

The Government of Kenya adopted a more innovative government-led approach to overcoming 

exploration-phase barriers, which had been stalling geothermal development, by creating the 

Geothermal Development Company, a wholly state-owned enterprise. To accelerate the 

previously slow geothermal project development timeframe and to reduce exploration risk, the 

company undertakes activities including detailed surface well exploration, infrastructure 

development, and drilling of exploration wells (CIF 2011). After completing exploration drilling, 

the company intends to tender proven resources to private investors for the subsequent 

development of power plants. The company’s current project at the Menengai geothermal steam 

field aims to produce 800 MW by 2018 (GDC 2011).